Government Securities are excellent debt investment options: Raj Khosla, MyMoneyMantra

In a major reform to enhance participation in the bond market in India, RBI has said retail investors can now open gilt accounts, allowing them direct access to invest in the primary and secondary government bond markets.

The central bank will be launching a platform called ‘Retail Direct’ to allow retail investors to directly access to the government securities market.

Money9 spoke to Raj Khosla Founder and MD,MyMoneyMantra.com to understand what this move means for retail investors.

Khosla: RBI’s move of allowing retail investments directly in government securities will certainly open up bond market in India. Until now, government securities were largely consumed by institutional investors such as mutual funds, banks, insurance companies. Retail investors had to depend on the secondary markets i.e via Reserve Bank of India’s NDS-OM System to access G sec options.

Thus, launching ‘RBI Retail Direct’ is instrumental in encouraging domestic retail participation in debt options. It will also enhance ease of borrowing for the government as well. Furthermore, G- securities are one of safest fixed income schemes in the country and thus offer a safer alternative to bank FDs and PO time deposit schemes. If RBI succeeds in reaching out to the domestic retail investor by easing the investment route through this portal, it can certainly change the dynamics of bond market in our country.

Khosla: Government securities are debt instruments issued by the government and offering guaranteed returns, with assurance of 100% principal payment and interest yield at the maturity. These are often issued by government to borrow, or for funding designated projects. The tenor is variable and could range from a few days to 25-30 years.

As a remedy for the COVID challenges, the Indian government is trying to focus on developing infrastructure and increase spending to revive a flailing economy. As FM said in the budget speech, government intends to borrow Rs 12 trillion from the markets in the next financial, and the opening up of G secs in retail will be a step in the right direction.

Khosla: Government securities are the safest debt investment options as they offer fixed returns and 100% guarantee of the sum invested. These are not only alternatives to FDs – as deposits in banks are insured up to a maximum of Rs 5 lakh, but also for annuity plans and debt mutual funds. Unlike FDs, G-secs can also be traded in the secondary markets. Also, FDs have a maximum tenure of 10 years while these govt secs can be for 25-30 years. This long term tenure means these bonds can be used as an alternative to annuity plans by retirees. Annuity rates in India are very low.

Since interest is paid out every 6-12 months, a retired person can build a monthly ladder of govt securities of different issue dates to generate a monthly interest income for himself that will be higher than what annuity plans offer. By opening up retail debt options, risk-averse retail investors such as pensioners will get direct access to safer and better yielding investment options thereby reducing their dependence on low yielding deposit schemes and fixed return mutual funds. It will be a shot in the arm for the domestic debt market.

Q. Should retail investors go for G-Secs?

Khosla: The move to open up G-sec market should certainly improve retail participation. However, to truly tap the domestic retail investors’ potential, RBI would need to educate customers about the proposed mechanisms and the benefits of the same. With the increase in information levels, we will certainly see a gradual surge in participation.

Government Securities offer guaranteed returns and thus are excellent debt investment options to diversify funds and mitigate portfolio risk. There is no default risk as these investments are backed by sovereign guarantee.

The investor can choose fixed income investment options across various maturities, and thus avail personalise flexibility. Further, there is ultimate ease of exit as one can sell G secs in the secondary market. No TDS is applicable on interest. As explained, there are multiple benefits of adding G secs to a retail portfolio. However, the bond market is far more complicated than the stock market. Several factors such as interest rates, inflation and govt policies can affect bond prices, and one has to keep in mind several parameters when transacting in the secondary market for bonds. It is always recommended that one should take advice from a qualified financial advisor on such matters.