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The Reserve Bank of India’s proposal to provide direct access to retail investors to its government securities investment platform opens the door to this risk-free investment for retailers. Apart from supporting the government’s expanding borrowing programme, the move may also pose competition to fixed deposits of banks and other debt instruments in the market.
What has RBI announced?
Terming it a “structural reform”, the RBI has proposed to allow retail investors direct access to its platform. The move is aimed at deepening the government securities (G-sec) market and to help smooth sailing of the government’s large yearly borrowing programme of around Rs 12 lakh crore. In the Monetary Policy Review last Friday, the RBI said retail investors can directly open their gilt accounts with the RBI through the Retail Direct’ facility to access both the primary market – where investors buy directly from the issuer — and secondary markets where trading takes place among investors. G-secs are debt instruments issued by the government and considered the safest form of investment. “We have this aggregator model through stock exchanges and other types of access, which we have provided, but now we are giving a direct access to the retail investors,” RBI Governor Shaktikanta Das said while announcing this move last Friday.
Can retail investors now buy G-Secs?
Currently, retail investors are allowed to submit non-competitive bids in auctions of government bonds. Further, stock exchanges act as aggregators and facilitators of retail bids. Now, the RBI has decided to move beyond aggregator model and provide retail investors online access to the government securities market.
So far, retail investors could access the NDS-OM (Negotiated Dealing System-Order Matching) through an aggregation model. Stock exchanges were allowed to aggregate the demand for gilts and place it to the RBI in the NDS-OM. Now, a retail investor can place a direct bid with the NDS-OM system and open a gilt account in the e-Kuber system, the RBI platform for gilt auctions. This will allow them to directly participate in the bidding process for buying gilts and also trading in the secondary market.
Until now, direct access was limited to institutional players such as banks, primary dealers, insurance companies, mutual funds, foreign portfolio investors and high net worth individuals. For retail investors, RBI had so far allowed access to any of the existing NDS-OM members, who also act as Depository Participants (DPs) for depositories NSDL and CDSL. The NDS-OM trading platform is used by institutional members such as commercial banks, primary dealers and depository participant banks to trade in the G-Sec market. These members maintain their holdings in government securities in Subsidiary General Accounts held with the RBI.
The new move comes amid burgeoning government borrowings which make it essential for the RBI to broaden its investor base. It has been trying to do so for some time. In April 2019, it allowed NRIs to access the local government securities market. Retail investors can also take exposure to government securities through debt schemes of mutual funds that invest in them.
How can investors benefit from G-Sec?
Investment in G-Sec, the safest debt instrument now directly available to retail investors, comes as an additional avenue besides existing options such as fixed deposits, small savings schemes, tax-free bonds and bond funds of mutual funds.
While investors can earn interest income on G-Sec investment, they also get capital gains by trading. The capital gains, however, depend upon the trajectory of interest rates and whether the investor is going to trade bonds before maturity.
If an individual holds a bond carrying a yield of 6%, a rise in bond yields in the market will bring the price of the bond down. So, if an investor wants to trade the bond before maturity, rise in yield results in capital loss. On the other hand, a drop in bond yield below 6% would benefit the investor as the price of the bond will rise, generating capital gains.
They also have low reinvestment risk in case the investor is saving for retirement. While fixed deposits are available for a maximum tenure of 10 years and thereby expose the investor to reinvestment risk, in case of G-Sec, the investor can lock himself at the current yield for 20-30 years without exposing himself to reinvestment risk.
Should you go for direct investment in G-Sec?
Investment experts say G-Secs are highly volatile and only investors who really understand them, or are willing to hold till maturity, should look at them. “While it is a safe investment option with zero credit risk, it is better to invest through mutual fund schemes that invest purely in G-Sec because the yields are very volatile and retail investors may not be equipped to handle it. However, investors who are willing to hold till maturity and are not bothered by day-to-day volatility can go for it,” said Surya Bhatia, founder of Asset Managers.
There are some who feel investors looking to lock-in their yield for a long period can also go for G-Secs. Vishal Dhawan, founder, Plan Ahead Wealth Advisors, said that since most debt investors such as fixed deposit investors are hold-to-maturity investors, they can go for G-Secs. “For anyone who is looking to buy a long term HTM, there are very few options. While interest rates have been falling over the last couple of decades and are expected to go further down, it is a very good instrument to lock-in to a certain yield for 20-30 years. While mutual funds offer tax arbitrage, an investor who doesn’t want any fund manager-related risk can go for direct investment option,” said Dhawan.
So, investors can have a portion of their debt asset in this asset class too.
G-Sec attracts tax on both interest income and capital gains in case the papers are traded in the market before maturity. While the interest income attracts tax at the marginal tax rate, the capital gains is taxed at 10%. They don’t attract capital gains tax if the papers are held till maturity.
Fixed deposits and post office deposits also attract tax on the interest income at the marginal tax rate; investment advisors say that G-Secs are better placed against FDs and other small savings schemes as far as savings for retirement are concerned.
On the other hand, bond funds are more tax efficient as they are taxed at 20% and also provide indexation benefit. Even tax free bonds hold an advantage over G-Sec for an individual in the highest tax bracket. While they have a yield of around 4.5%, it is equivalent to pre-tax return of 6.5%.
What factors should one keep in mind while investing directly in G-Sec?
It is important to note that G-Sec yields move on account of various factors and investors will have to keep an eye on both domestic and global developments while investing in them. If inflation and interest rates in the economy are key factors that determine the yields, they are in turn affected by various other factors such as economic growth, sovereign rating, money supply, government borrowing, global liquidity and geopolitical developments among others. So investors need to be watchful of developments before taking a decision.
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source https://earn8online.com/index.php/202732/direct-access-to-govt-gilt-bonds-what-to-look-at-before-investing/
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