Retail investors can finally invest in directly government securities issued by the Reserve Bank of India (RBI). Called, RBI’s retail direct platform, it was launched on November 12. After some credit events in highly-rated bonds, it comes as a relief that retail investors can now access the risk-free government securities (g-secs), too.
Getting on board Retail Direct
Onboarding is smooth (https://www.rbiretaildirect.in) and takes less than 10 minutes if you have all your details handy. What you need is your Permanent Account Number (PAN), verified C-KYC (Know Your Customer), a scanned signature and a scanned cancelled cheque of the bank you wish to assign for inflows and outflows.
Nomination is required. You would get a few one-time passwords as part of the account opening process.
But is a smooth account-opening process enough to attract retail investors?
Government bonds are risk-free. There is no danger of default on payments as they are guaranteed by the Government of India.
The 10-year g-sec is the most popular in this category. However, g-secs come in varying tenures – from 91-day treasury bills to 40-year bonds. You can choose the lower maturity securities to park near-term money and use long-dated maturity g-secs for goals that come later.
Holdings are stored digitally and investments start at Rs 10,000. Interest is paid twice a year – it helps those who need a regular income. The RBI Retail Direct platform also allows you to invest in State Development Loans (SDL) and Sovereign Gold Bonds.
Since you would buy g-secs directly, there are no intermediary charges.
What doesn’t work
G-secs may not have credit risk, but they come with duration or interest rate risk. Bond prices and interest rates have an inverse relationship – high rates pull down bond prices. It is easy to avoid interest rate risk completely by holding the bond till it matures and receiving all the interest payments.
To buy g-secs through this platform, you will have to participate in the primary auction with a non-competitive bid. So, you enter a purchase amount, but not the price at which you will buy. Ultimately, you will be allotted bonds on the average bid price. This is where things begin to get a little bit complicated. You need to know the days to bid for specific securities and then there are matters such as mark-up price to contend with.
According to Ashish Shah, founding director, Wealthfirst Portfolio Management, “Buying through this non-competitive bid process is simpler than selling. When it comes to selling, you have to transfer your securities to CCIL, enter the bid price and, without the presence of a market maker for small lots, there is no telling what price you may get. Is a two-way quote going to be available? Is there is someone to buy a small lot, and at what price will it be?” These are some practical issues which may keep retail investors at bay.
Moreover, the interest received gets taxed at your marginal rate, which can be a disadvantage for those in the higher slabs.
Are there other alternatives?
The alternative could be investing in Gilt Funds. But there is a cost to contend with. Such funds can have an annual expense ratio of anywhere between 0.1-1 percent of the amount invested. Moreover, there will be price fluctuation caused on a daily basis. This can be unnerving, even if you are planning to match your holding period with the average maturity of the scheme. Being open-ended in nature, you can exit such schemes at any time.
Gilt mutual funds also offer tax advantage. If you sell units after three years, you pay a long-term capital gains (LTCG) tax of 20 percent with indexation benefits. “The indexation benefits reduces your cost price (on paper) and you pay lower taxes. There are no indexation benefits if you sell government bonds directly,” says Vikram Dalal, founder and managing director, Synergee Capital Services.
Selling government bonds directly after a year’s time, will attract LTCG tax of 10 percent with no indexation benefits. Besides, in gilt funds, your interest gets reinvested and you get indexation benefits on that amount too.
Should you invest?
The pick-up in direct buying from individual investors remains muted. This may be attributed to the complexity of transacting and trading in bonds. Shah says that it’s tough for investors to understand the difference between a g-sec that matures in 2022 from another one that matures in, say, 2030. “The impact of interest rates on yield is also hard to grasp. Selling a Rs 1 crore lot takes more than a day; retail lots might be harder to sell.” Said Shah.
Advisors, too, find it cumbersome. Anup Bansal, CIO, Scripbox says, “While there is liquidity in certain maturities of G-secs, others are not liquid enough. Moreover, short-term fixed deposit rates are better at the moment and we can get better tax efficiency through the mutual fund route, too.”
To begin with, opt for RBI Retail Direct if you wish to hold g-secs till maturity. But buying g-secs now, at low interest rates and locking them away for long tenures would be unwise. On this parameter, g-secs aren’t any better because their expense ratios further diminish returns. Understand the nuances of the non-competitive bidding before jumping in.
While cost is an advantage in going direct, without the ease of transaction, both at the time of buying and selling, it’ll take time for retail investors to warm up to this platform.