For long, Indian retail investors seeking regular income haven’t had access to the safest and most reliable option in the market — the government security.
Yes, most of the money you invest in insurance products, pension funds and provident funds, and some of the money you invest in bank deposits and debt mutual funds gets channelled into government debt securities (g-secs).
But this indirect ownership requires you to incur costs charged by these vehicles that eat into your returns. Now, with the government allowing direct retail ownership you can bypass such intermediaries. Here’s a deep dive into RBI’s new Retail Direct platform for buying g-secs.
What it offers
This platform allows individuals to open and maintain a Retail Direct Gilt (RDG) account directly with the RBI.
To open your account, you need a PAN card, a savings bank account and an officially valid KYC document. NRIs eligible to invest in g-secs under FEMA can open this account too.
The onboarding process, which can be done completely online, is not as simple as that for some new-age fintech platforms. But it can be completed in a day or so if your KYC details are correctly captured in the central repository.
G-secs can be bought either during their initial issue or after they begin to trade in the secondary market.
RBI’s Retail Direct platform gives you access to primary auctions first. To get access to secondary market trades which happen on the NDS-OM (Negotiated Dealing System - Order Matching), you need to apply separately on Retail Direct to get a user login and password.
RBI’s Retail Direct is not the only platform that allows you to participate in g-sec auctions. NSE’s goBID and broker-owned platforms such as Zerodha Coin also offer such access and may be easier to onboard.
But the RBI’s platform scores over others on cost, as it charges no fees for account opening, maintenance or transactions.
RBI conducts periodic auctions of g-secs according to a schedule (called the borrowing calendar) that it puts out every half year for g-secs and quarter for treasury bills. Through this new platform, retail investors can invest a minimum of ₹10,000 going up to ₹2 crore in these auctions.
How auctions work
When you log on to Retail Direct, you’ll find a dashboard listing out the securities that are currently being auctioned. They can be of four types — dated government stock (Central government borrowings for 1 year to 40 years), treasury bills or T-bills (Central government borrowings for 91, 182 and 364 days), State Development Loans (State government borrowings for 1 year to 30 years) and Sovereign Gold Bonds.
You’ll find details such as the type of security, its maturity date, total auction amount, the amount reserved for retail bidding (called ‘non-competitive’ bidding amount) and the reserve price and yield.
RBI sets a maximum coupon rate or minimum price for each security in every auction and institutions bid based on this.
The lowest coupon or highest price at which an auction gets fully subscribed becomes the ‘cut-off’ yield or price. As a retail investor you need not know how to bid and can simply choose at the final cut-off price or yield that will be discovered by institutions. Money is collected upfront from your bank account based on the reserve price set by the RBI.
If the auction discovers a lower price, the excess is refunded. To know the cut-off price or yields, you can track the auction results put up on the RBI website.
Once you’ve got allotment in the auction, you simply need to hold your bond until maturity when the RBI will automatically redeem it.
T-bills are issued below face value and redeemed at face value, the difference being your interest. Other g-secs pay half-yearly interest at the cut-o ff yield.
Though g-secs a re-listed on the NDS-OM platform, where you can sell or buy them in theory, a majority of them (except for recent 10-year g-secs) are thinly traded and you may not be able to sell at a time of your choice. When you buy g-secs therefore, do match their maturity to your financial goal and do not budget for liquidity before maturity.
How to use them
With fixed income options such as bank deposits, post office schemes, NCDs and debt mutual funds already on the menu, where could g-secs fit into your portfolio?
Debt mutual funds invest in corporate bonds and are certainly not as safe as g -secs. But they score over g-secs on liquidity (you can sell your units anytime to the fund) and offer more friendly taxation.
If held for over 3 years, growth options of debt funds allow you to accumulate the interest and pay long-term capital gains at 20% after indexation benefits. Interest from g-secs is taxed every year at your slab rate.
Published - December 26, 2021 10:10 pm IST
