The Indian Government is keeping up with the times. Recently, the Reserve Bank of India (“RBI”) has launched the ‘Retail Direct Scheme’ that will allow individual retail investors to invest in Government Securities online through the Government’s portal. But first, let’s understand what Government Securities are.
What are Government Securities?
Nations across the world, issue what we call G-secs to fund routine expenses required to run the nation. The Government is considered to be the most trustworthy and promise-fulfilling entity that ever exists. So when the Government issues securities, it promises to repay the original invested capital and interest yields as and when agreed upon. As investors look to formulate our portfolios, allocating a portion of our savings in low-risk, suitable return-yielding securities is generally a wise decision. That is why it is essential to understand how government securities are issued and what changes the GOI brings about in this sector.
What are the types of G-secs?
G-secs are tradable instruments that are issued by both the Central and the State Governments. The Central Government issues treasury bills and dated securities, while the States issue only dated securities commonly known as State Development Loans. Treasury bills are short-term (usually less than a year), and dated securities are issued for a more extended period (more than a year).
Treasury bills are available in 3 tenure types – 91 days, 182 days, and 364 days. They are discount issues, similar to zero-coupon bonds that are redeemed at par. Dated securities, however, carry an interest obligation that could either be fixed or floating. The interest is generally paid half-yearly, and the tenure ranges from 5-40 years.
It is important to note that these instruments are money market instruments, which are easily accessible only to high-net-worth individuals and entities. Hence, until now, this investment market was dominated by big giants – banks, insurance companies, and mutual funds. The lot size used in trading usually started from Rs.5 crore. This made it very difficult for retail investors to invest in G-secs directly.
What is the new proposal of the RBI?
The problem with the existing situation is that a small investor could not trade in small quantities and small lot sizes. This means that there was no liquidity in the secondary market. If the retail investors wanted a portion of their portfolio invested in government securities, they had to do it through mutual funds.
Mutual funds charged fees for managing funds, which reduced the return yield at the end of the day. Plus, the investors could not have control over investment decisions. Hence, it was challenging for them to exit their trades.
Through the RBI Retail Direct Scheme, retail investors would access the primary and second government bond markets. Investors can open their ‘Retail Direct Gilt (“RDG”) Accounts’ with the electronic portal of the Central Bank at absolutely no cost to them. The investors will only have to bear the costs associated with the payment gateway for processing transactions. Under this scheme, retail investors will deal in treasury bills, CG bonds, SG bonds, State Development Loans, and Sovereign Gold Bonds.
How to open an RBI RDG Account?
There is no special requirement for opening this account. An individual can open this account by submitting basic details like PAN, mobile number, email-id, etc. – just like the KYC requirement in banks.
Once you open an account on the RBI platform, you will access the portal that opens up the world of government securities and the numerous possibilities it provides. You can then participate in G-secs’ primary issuance and transfer your holdings to the secondary market.
Final Takeaways
The Government wants to increase public participation manifold – due to which the transaction size has been reduced to as low as Rs.10,000. Unlike mutual funds, investors can manage their portfolios themselves and have complete control over investment decisions considering their liquidity needs.
Before investing, make sure you understand the instrument and all market risks associated with it. You will have to keep track of the news, particularly the macro-economic happenings, and consider the changes in interest rates because that will directly impact bond prices. Understand all the tax implications associated with the Government Bond market. If you do not have enough time to plan your investment in G-secs appropriately, take professional help and consider a mutual fund that will invest in government securities for you.
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Sources
- https://www.livemint.com/money/personal-finance/retail-direct-gilt-accounts-add-to-investors-choice-11627412271519.html
- https://www.personalfn.com/dwl/how-investors-can-benefit-from-rbis-retail-direct-gilt-account
- https://currentaffairs.adda247.com/rbi-launches-retail-direct-scheme/
- https://indianexpress.com/article/explained/explained-all-about-retail-participation-in-the-government-securities-market-7176210/
- https://www.rbi.org.in/scripts/FAQView.aspx?Id=79
