I remember my conversation with a client Mr Venkat in September 2018. He had called me from Singapore, soon after he read about the IL&FS debt crisis. Basically, he was concerned about his investments in liquid and debt mutual funds and wanted my insights on the event that had panned out.

While talking to Mr Venkat, I realised that he had invested significant portion of his retirement corpus in debt mutual funds and corporate deposits. He expected these instruments to offer him good interest income, with a safety on his capital.

But as we know, some mutual fund managers take undue risk with investors’ money. Particularly when they are chasing yields/returns and competing to garner more AUM in the debt scheme they manage. Unfortunately for investors, most liquid and debt mutual funds clearly fail to adhere to the recommended safety standard.

Being a senior citizen with low-risk appetite, some of the debt funds Mr Venkat held in his portfolio were practically detrimental for his financial wellbeing. These funds had a higher exposure to bonds issued by private issuers.

As you may know, debt securities issued by private companies carry higher credit risk as compared to Government Securities (G-secs) and PSU bonds.

So, I suggested that he trim exposure in those debt funds that were prone to higher credit risk and also resist from investing in corporate bonds. Instead, he could consider funds that focus on investing in Government and Quasi-Government securities. Well, he agreed!

Notably, G-secs include instruments like Central Government bonds, State Government bonds, Treasury bills, etc.; whereas, Quasi-Government securities include bonds issued by government-backed institutions such as, NHAI, NABARD, REC, PFC, etc.

And then came his next question…

“Can I invest directly in Government securities?”

The answer was probably a ‘No’ for retail investors.

So far, buying and selling of G-secs (directly) has been practically difficult for retail investors, due to the wholesale nature of the G-sec markets. The structure of Indian G-sec markets is suitable more for institutional investors such as banks, mutual funds, and insurance companies. They typically trade in lot sizes of Rs 5 Crore and above. Due to big-ticket size transactions, the retail investors find it difficult to trade directly in G-secs. Thus, they have to take the indirect route of mutual funds, insurance, etc. to invest in G-secs.

Nevertheless, here comes the good news for retail investors like Mr Venkat looking to invest directly in G-secs.

In February 2021, the Reserve Bank of India (RBI) had proposed that retail investors be permitted to directly buy and sell G-Secs through its platform. Taking a step further in this direction, it has recently done a preliminary announcement of ‘RBI Retail Direct’ scheme. This scheme will provide retail investors the facility to invest directly in G-secs through ‘Retail Direct Gilt Account’, which is expected to be launched soon.

What is RBI’s Retail Direct Gilt Account?

Retail investors who wish to avail the benefits of RBI Retail Direct scheme and invest directly in G-secs will have to open and maintain a ‘Retail Direct Gilt Account’ with the RBI. Through this account the investors will have access to both primary market (buying directly from the RBI) and secondary market (buy from other investors at the prevailing market price).

Retail Direct Gilt Account (RDG account) can be opened through an ‘Online portal’ created specifically for ‘RBI Retail Direct’ scheme. Registered individual investors will be able to access primary issuance of G-secs as well as Negotiated Dealing System-Order Matching system (NDS-OM) through the ‘Online portal’. NDS-OM is an electronic order matching system for secondary market trading in G-secs.

Using their Retail Direct Gilt Account, the retail investors can invest in GOI Treasury Bills, Central Government Bonds, State Government Bonds, State Development Loans (SDLs), and Sovereign Gold Bonds (SGB).

Who can open Retail Direct Gilt Account?

  • Any individual can open a Retail Direct Gilt Account provided that he/she has a savings bank account, PAN, a valid email id, registered mobile number, and any valid document required for KYC purpose.

  • NRIs eligible to invest in government securities under Foreign Exchange Management Act, 1999 (FEMA) can also open Retail Direct Gilt Account under RBI Retail Direct scheme.

  • Investors can also open a joint account with another individual who is eligible to open the Retail Direct Gilt Account.

  • Notably, there is no fee to open and maintain the Retail Direct Gilt Account with RBI. However, investors will have to bear a nominal payment gateway fee while trading in G-secs.

Benefits of Retail Direct Gilt Account

  1. The Retail Direct Gilt Account will facilitate investors with the ease of transacting in G-secs which carry almost zero default/credit risk.

  2. Small lot-size transactions (perhaps as small as Rs 10,000) may help increase the participation of retail investors in G-secs, and increase liquidity in the secondary market for retail investors.

  3. This can increase popularity of direct G-sec trading among retail investors. Investors can trade in securities across maturities, i.e. 91 days to as long as 40 years.

  4. Investors can use the facility to create and manage their own portfolio of G-secs and other sovereign bonds. They can buy and hold securities based on their cashflow requirements.

  5. This can lead to a gradual shift of domestic savings from traditional instruments like bank fixed deposits to sovereign rated G-secs and bonds.

How will Retail Direct Gilt Account function?

  • – The 'RBI Retail Direct' scheme is a one-stop solution to facilitate investment in G-secs by individual investors.

  • – Investors who open and maintain a Retail Direct Gilt Account with the RBI will get access to an online portal that will help them actively participate in G-secs.

  • – The account will provide access to the primary issuance of G-secs, as well as secondary market through NDS-OM.

  • – NDS-OM is the back trading system for G-secs that currently has Request for Quote (RFQ) dealing mode/section for secondary market trading.

  • – NDS-OM may soon start providing Odd lot section. Retail investors will be able to trade in retail lots using the Odd lot section or the RFQ section, as applicable.

  • – Through Retail Direct Gilt Account, investors will also be able to participate in the primary issuance of G-secs in small lots (say Rs 10,000)

  • – Investors will have to bear a nominal payment gateway fee while trading in G-secs.

  • – The securities that investors buy will reflect as holdings in their Retail Direct Gilt account. The investor can easily trade in the securities as per their choice.

Should you consider opening a Retail Direct Gilt Account?

Retail Direct Gilt Account will be beneficial for astute investors who would prefer trading and managing their G-sec portfolio themselves. Investors need to have better understanding of the G-sec markets and keep on monitoring the macro-economic factors that would impact the prices of government securities and bonds.

Investors should also consider the risk associated with G-secs. While G-secs carry no credit/default risk, they may be prone to interest rate risk, especially in a rising interest rate scenario. Notably, the bond prices fall when interest rate rises, whereas the prices rise when the interest rates fall.

Investors need to actively track the interest rate direction and accordingly decide the maturity period for G-secs they plan to buy. Also, the maturity period of the securities should be picked based on their cashflow requirements and coupon expectations.

Many investors already have their investment in G-secs via indirect route like mutual funds, insurance schemes, pension schemes, etc. For investors who lack the knowledge and skills to actively track G-sec markets, would still be better-off considering Gilt funds offered by mutual funds.

Notably, mutual funds offer gilt funds under different categories like Short to Medium Term Gilt Funds, Constant Maturity Gilt Funds, Target Maturity Gilt Funds, etc. Under Gilt funds, the professional fund managers can actively pick the securities as per their expertise and macro-economic outlook.

While mutual funds typically carry a minimum investment amount of Rs 5,000/-, the retail lot in case of direct investment may be around Rs 10,000/-.

Investors should also keep in mind the tax implication while trading directly in G-secs. The capital gains earned by selling G-secs and sovereign bonds in the secondary markets (before maturity) will be liable for capital gain tax along with indexation benefits (if applicable). Whereas, the regular interest income received from G-secs will be taxable as per the income tax slab of the investor.

In case of direct investing in G-secs, the capital gains will be calculated across securities traded by the investor in a financial year. Whereas in case of Gilt mutual funds, the capital gains are calculated for the holding period of mutual fund units, irrespective of number of trades executed by the fund manager while managing the scheme.

Overall, investors opting for the direct route need to be well-informed about G-secs and the factors impacting the price movement of G-secs. If not, then it will be a prudent choice to take professional assistance and consider Gilt Funds or debt funds that actively invest in G-secs.

This article first appeared on PersonalFN here

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