Ahead of index entry, Indian bonds see action

For nearly two months, foreign institutional investors, or FPIs, have been offloading shares in the stock market. Conversely, this month has seen a surge in buyers in the debt market. Data from NSDL up to May 28 shows that following a sell-off of Rs 8,671 crore in April, FPIs have divested over Rs 22,000 crore worth of shares in May.

On the contrary, following a divestment of Rs 11,218 crore in debt securities in April, foreign investors have recorded net purchases of Rs 7,427 crore by May 27. The deadline for inclusion in the JPMorgan GBI, or Government Bond Index, issued by the RBI, is fast approaching on June 28. By March 21, 2025, Indian bonds are set to represent 10% of China’s weightage in this index. Hence, there is a renewed interest among foreign investors in domestic bonds following the divestment in April. In the entire fiscal year 2024, FPIs have consistently purchased domestic bonds.

Let’s begin by understanding what G-Sec bonds are. The government raises funds through bonds to cover its daily expenses and operational needs. These bonds, known as government securities or G-Secs, encompass bonds issued by both central and state governments, treasury bills, and similar financial instruments.

Bonds with maturities exceeding one year, known as government bonds, are issued by both central and state governments. Conversely, Treasury Bills, with maturities of less than one year, are exclusively issued by the central government. The government requires funds for significant infrastructure projects such as highways, hospitals, roads, and bridges.

But sometimes, the government’s expenses are not met by the revenue it collects through taxes from us. So, the government borrows money from the general public, organizations through these bonds.

In simple words, the government takes loans from us.

On behalf of the central and state governments, RBI issues them, and along with returning the full value of these bonds at maturity. A commitment to pay interest from time to time is also included. This interest payment is also called a coupon payment.

G-Secs can also be sold through the stock market before maturity because these bonds are listed in the stock market.

Now let’s understand how one can invest in G-Sec bonds?

RBI recently launched an app named RBI Retail Direct, through which you can buy and sell government securities from your smartphone.

In November 2021, RBI had launched the Retail Direct portal under the Retail Direct Scheme… retail investors can invest in government bonds by opening a Gilt Account on this website… Through RBI’s Retail Direct Scheme, investors can buy government securities in primary auctions as well as in the secondary market, i.e., through the stock market… Now with the launch of the RBI Retail Direct App, retail investors can transact in government securities through the app on their smartphones…

Now the most important question is, who should invest in G-Sec bonds?

When considering methods to secure savings or make safe investments, our initial thought often gravitates towards bank fixed deposits or FDs. However, some individuals may find FDs too risky. Therefore, for such individuals, there exists a secure alternative with favorable returns—government securities or G-Secs.

G-Secs are issued by both the central and state governments, providing enhanced security due to their governmental backing. Investors can expect a full guarantee of receiving their invested amount back.

Conversely, although bank FDs provide insurance on deposited amounts, the coverage is limited to Rs 5 lakh. In the event of a bank facing financial trouble, you will only receive Rs 5 lakh, regardless of the total amount deposited.

According to Tax and Investment Expert Balwant Jain, 90 out of 100 individuals lack awareness about G-Secs. While bank FDs typically offer higher interest rates than G-Secs, the decision to invest in G-Secs depends on factors such as your investment horizon, amount invested, and risk tolerance.

Overall, G-Sec bonds present a superior investment option compared to bank FDs, offering complete safety of your funds alongside attractive returns. Therefore, if you seek returns similar to or better than FDs without assuming as much risk, G-Secs, or government securities, may prove to be the preferable choice.