Retail investors can finally invest in government securities directly. The ‘RBI Retail Direct (RBI-RD) Scheme’ facility gets launched today. The scheme allows individual investors to open an account with the Reserve Bank of India (RBI) to invest in government securities. Should you invest?
What’s on offer
RBI-RD is a platform that is aimed at encouraging retail investors into buying government securities. RBI had proposed the launch of such a platform in February 2021. Government of India Treasury bills, Government of India dated securities, sovereign gold bonds (SGB) and state development loans (SDL) can be traded using this facility.
But what is so new about this facility?
The best way for retail investors to buy government securities currently is through gilt mutual funds. Another alternative was to buy it through g-sec dealers who would place bids (along with other institutional buyers such as mutual funds) in RBI’s primary market auction, held every Friday. But if you want to buy existing g-secs listed in the secondary market, then you can buy them from the BSE and the NSE. But these markets are illiquid. Your broker, too, can buy g-secs on the Negotiated Dealing System (NDS-OM) platform and transfer them to your demat account.
But there are challenges. “A low level of awareness among small investors, procedural issues such as opening of a CSGL account with the RBI and low liquidity in the secondary market are some of the reasons why investors stayed away from investing in G-Secs,” says Vikram Dalal, Founder and Managing Director, Synergee Capital Services. Constituent subsidiary general ledger (CSGL) account is a sort of demat account that holds government securities and facilitates trade on the NDS-OM. The NSE GO-BID app that allows you to buy g-secs did away with the CSGL account and makes g-secs available directly in your demat account. But awareness is low. The new facility aims to do away with such hassles.
“Fiscal deficit is rising and so does the government borrowing for funding it. That makes RBI look for more sources of funds. Hence, RBI is keen that even individual investors tap G-Secs and thereby widen the investor base,” says Deepak Panjwani, Head-Debt Markets, GEPL Capital.
Are investors keen on G-Secs?
Small investors may not be jumping to grab the opportunity. “Small investors look to invest in ‘high return generating’ assets. G-Sec though comes with little credit risk, but they do not offer great returns compared to other avenues such as most small saving schemes and stocks,” says a fund manager who did not wish to be identified.
But there would be some who may find this opportunity worth exploring. “Long-term investors suffered due to various adverse developments in perpetual bonds in the recent past. Such investors may find long-term g-secs attractive, as there is no credit risk involved and the g-secs are widely owned by institutional investors,” says Panjwani.
Ankit Gupta, Co-Founder and CEO, BondsIndia.com says, “There has been a dearth of options in high-quality fixed income avenues where investors can invest directly. Investors have burnt their fingers in many low-rated bonds and fixed deposits of co-operative banks.” RBI’s G-Sec offering should click with retail investors over a period of time, he adds.
But what about poor liquidity?
Low secondary market liquidity in retail lots has been the biggest drawback of g-sec investing. In the secondary market, if your trade size is significantly below the ball-park figure of Rs 5 crore, you may have to sell it below the fair value. “Investors have to observe the secondary market liquidity scenario after the launch of RBI-RD. Though the liquidity is expected to improve over a period of time, it is not assured,” says Joydeep Sen, Corporate Trainer-Debt. While investing in G-Secs, ideally you should be prepared to hold it till maturity, he adds.
Dalal expects RBI to take firm steps to infuse liquidity in the secondary market by asking primary dealers and large institutional investors to participate in the odd lot market as well. “The success of this facility hinges on the improvement in secondary market liquidity,” he adds.
“Bond ETFs have seen better liquidity due to market makers,” says the fund manager quoted above.
Should you invest?
Though it is a good idea to invest in an investment avenue with no credit risk, investors have to keep in mind various factors. “Compare the rate of returns offered by g-sec with an alternative of similar tenure with almost no credit risk,” says Sen. For example, a five-year g-sec can be compared with a five-year fixed deposit of a nationalized bank or the National Saving Certificate. “Do check pre-mature exit clauses also,” he adds. Barring tax-saving fixed income investments, other options have a premature withdrawal penalty or they allow only a partial withdrawal. This should be seen in the context of low secondary market liquidity in G-Sec retail lots.
Interest earned on g-sec is taxed in the hands of the investors. Also choosing the right g-sec can be an issue for many investors. Investors in high income tax slabs, may find mutual fund options such as corporate bond funds and gilt funds more attractive.“Since you are opening a dedicated account for investing in g-secs with the RBI, you have one more account to keep track of,” says Gupta. Had it been through a demat account, it would have been better.