Retail investors cold-shoulder government bond market

The equity cult seems to have taken a large number of retail investors in its spell with people marching to the equity markets in big numbers but failing to warm up sovereign bonds, so much so that an online platform that enables the common investor to put his money with government bonds has failed to elicit decent public participation.
The platform was thrown open to the public on November 12, 2021.
While the equity markets have been on fire in the past few years luring more and more investors, the mutual fund industry too has witnessed a steady rise in mass participation in expectation of handsome returns.
Government bonds have also faced tough competition from rising interest rates on fixed-income instruments (read FDs) from banks and corporates.
A report in The Economic Times has also stated that there is an enduring mystery about government bonds that prevented mass participation.
Since the day it was inaugurated till December 11, 2023, Reserve Bank’s Retail Direct platform has recorded only 1,06,421 accounts with the total investment amounting to Rs 3,337.51 crore.
A small piece of statistic helps to realise how miniscule the retail participation is. The outstanding quantum of central government bonds was Rs 100.26 lakh crore.
On the mutual funds front, latest data from AMFI (Association of Mutual Funds in India) showed that Systematic Investment Plan (SIP) accounts stood at 7.44 crore in November 2023. The money collected through the SIP route was at Rs 17,073 crore only for the month of November.
“When retail investors look at government securities, they tend to compare returns with the fixed-deposit returns. Various banks are offering very attractive rates, ranging from 7.25% all the way to 7.75% or even 7.85%. When compounded quarterly, that could push returns above 8%. Clients are always attracted to equities because of superior returns. Whereas in the last three years, bond markets haven’t done very well. In 2021, 2022 and 2023, if you look at the three-year return, it’s below 5%,” remarked Dhawal Dalal, senior EVP, Edelweiss AMC.
The most traded three-year government bond in the secondary market last offered a yield of 7.05% and that obtained from a 10-year government bond was at 7.17%. This clearly loses out to a peak annualised yield of 7.19% on two-year to less-than-three-year FD (below Rs 2 crore) offered by State Bank of India, the country’s largest bank. For senior citizens, SBI has on offer an annualised yield of 7.71% for two-year to less-than-three-year and five-year to less than-10-year deposits. Many other banks offer higher returns.
Ironically, the government itself offers attractive rates and tax breaks on small savings instruments that have been attracting a large number of depositors for years. Several small savings products offer higher returns than government bonds. “On the tax front, in 80C or an equivalent of that, perhaps a Rs 50,000 limit for whatever income comes could be considered. Essentially it can be that for whatever you invest up to a limit, you can reduce your tax burden by Rs 10,000 or so. Alternatively, certain interest income could be exempt from tax,” said Vikas Goel, managing director and chief executive director of PNB Gilts.
Awareness of government bonds was also felt to be one of the limiting factors.
“The understanding of the bond market is very limited. That is one of the main reasons why people are not attracted to Retail Direct. People still think that once they invest, they cannot sell. More awareness and education is required,” said Debendra Kumar Dash, senior vice president of treasury at AU Bank.