Money9 Edit | Retail investors in G-Sec market: Honourable intent, timing questionable

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Cricket primers tell us that timing is everything. Investment pundits also have a similar view. The opening up of the government securities market in India for retail investment seems to be an example of the right move at a wrong time.

The honourable intention of deepening and widening the bond market was at work when the Centre paved the way for retail participation in the G-Sec market, hitherto a preserve of institutional investors like banks, MFs and insurance companies. Unfortunately, the move came at a time when the yields were creeping up in the government bonds of different tenures, especially the 10-year benchmark bonds.

Prices of bonds, or government securities, is inversely related to interest rates – if interest rates fall, bond prices rise and when interest rates rise, bond prices fall.

The rate of interest of a bond is known as its coupon rate. It is fixed when the instrument is issued. Naturally when interest rates in the market rise above the coupon rate, the instrument becomes unattractive driving down demand and its price. The reverse is also true – when interest rates in the market falls below the coupon rate, the higher interest rate of the bond looks attractive to investors triggering a rise in its price.

A rise in yields may lead to a rise in interest rates that would quickly render existing bonds in the market unattractive driving down their prices. For a small investor looking to enter this market, it will hardly be tempting to put his money into an asset class with declining prices.

One might argue that a bond is essentially a long-term instrument and investors looking for stability don’t have to bother since they would get back their money at the end of the term. But then, investment is also an act of faith. And not only of arithmetic.