Demystifying the 8216;G8217; Bond

Expounding on the benefits of investing in government bonds, Kilawala said it is ideal for elderly people, especially those who are about to retire. She says the only 8216;hurting point8217; could be the lack of strong tax incentives, for which the RBI has already approached the government.

However, the fact remains that dealing in G-Secs can be cumbersome and the give comparatively lower yields. Most of all, they face stiff competition from other investment options in the market. The stock market, for example, is easier to track and invest in. Returns can be quite high, depending on market conditions.

8216;8216;In the G-Sec market, the investor has to plan in advance while entering and leaving. The procedure is quite cumbersome for the retail investor,8217;8217; says a dealer at Gilt Securities Trading Corporation Limited GSTCL, a subsidiary of Canara Bank.

GSTCL is one of the primary dealers PDs in the country accredited by the RBI. Besides primary dealers, specified banks and brokers can also be approached by those who want to invest in government paper. However, chances are that if you approach a bank or broker asking for advice on how to invest your money, they will rarely suggest the G-Sec option. 8216;8216;There is no incentive for these brokers to encourage the sale of government bonds,8217;8217; says D. Basu, chairman, Securities Trading Corporation of India, the securities trading arm of the RBI.

8216;8216;They don8217;t get special tax incentives, the brokerage is very little8230; obviously they will promote other form of investments.8217;8217; The biggest plus on the side of G-Secs is that its the safest form of investment. In fact, bonds issued by the Union government are called zero-default risk because there can never be a run on the Government of India.

8216;8216;Another attraction is that there is no tax deducted at source and there is some tax rebate. But then annuities and NSC certificates offer better tax options to pensioners, which keeps them away from G-Secs,8217;8217; says K. V. Ramakrishnan, deputy general manager, STCI. He says usually high net-worth individuals show interest in this, especially due to the safety factor. Ramakrishnan feels that though now retail investment in G-secs is not high, it will pick up in the long run.

Not everyone is so optimistic. 8216;8216;Retail investment in G-Secs is a non-starter. The RBI should instead encourage small investors to go through mutual funds,8217;8217; says an expert from a leading investment banking firm in Mumbai.

G-Secs, gilts, government bonds or government paper. Call them what you will, government securities remain a mystery to the common man. Here8217;s a guide to understanding them better

Why invest in G-Secs? Zero-default risk investment in case of Union government bonds; no tax deducted at source; tax rebate of Rs 3,000 per annum on interest income u/s 80L; easy redemption; assured liquidity.

Why not? Cumbersome procedure for investment, lack of knowledge even on basic questions like how to buy it, low yield as compared to other investment options available in the market.

Types of bonds
G-Secs have maturity periods ranging from one to 30 years. They carry an interest rate, called the 8216;coupon8217; rate, which is paid semi-annually. Among the types of G-Secs, some important ones are:
8226; Dated securities: The date of maturity and coupon rate is specified. For example, 8216;12.50 per cent GOI 20078217; is a G-sec carrying interest of 12.50 per cent and maturing in 2007.
8226; Zero coupon bonds: They are issued on discount and redeemed at par.
8226; Floating rate bonds: They have variable interest rates with a fixed percentage over a benchmark rate. They may specify a maximum and minimum interest rate payable on it.

How to purchase them
G-Secs are issued in denominations of Rs 100 each. But they are usually purchased at a premium, say Rs 103, Rs 107. RBI issues them through auctions. It decides the interest rate called coupon on the bond, based on market response. It then announces a date on which the auction will be held. A common investor can participate in the auction by giving a simple application to a bank or an authorised broker or a primary dealer PD. RBI has said that 5 percent of the total amount to be auctioned, must be kept for retail bidders, i.e. small investors, provident funds etc. For instance, if Rs 5,000 crore worth G-Secs are to be auctioned, the share for retail bidders is Rs 250 crore. If the retail bids are more than this amount, the allotment will be made proportionately. The rate at which the retail investors can purchase the bond is the weighted average rate that emerges in the auction.

Liquidity
If you8217;ve bought a 10-year-long bond but want to encash it within say four years, don8217;t fret. You can sell it in the secondary market. All primary dealers PDs are under obligation to provide a sell rate for G-Secs and you can approach them with your bonds. Quotes are also available in daily newspapers. G-secs can be liquidated in a day. The penalty for early withdrawal may also not be too stiff if there hasn8217;t been a sharp rise in interest rates. On the other hand, investors have to pay a penalty in the case of premature withdrawal of bank-term deposits.

Treasury bills
Like G-Secs, Treasury Bills are also issued by the RBI on behalf of the Central Government to finance its borrowing programme. However, T-Bills are of shorter duration 8212; 14 days, 91 days, 182 days and 364 days. They do not carry a coupon rate but are issued at a discount and redeemed at par. Minimum investment required is Rs 25,000 crore at a price of Rs 103 the face value of all G-sec is Rs 100.