Encashing direct investments in gilts quickly could be more difficult than encashing gilt mutual fund units. Direct investment in Gilts can be considered by someone looking for safety of investment of the highest level and who is willing to remain invested till maturity of the instrument.
RBI’s move to allow retail investors to open gilt investment accounts directly will hopefully make it easier for retail investors to invest in government securities than at present. The attraction of government securities is the sovereign guarantee that they offer. This needs to be viewed in the light of the fact that bank FDs are insured only up to Rs 5 lakh with the Deposit Insurance and Credit Guarantee Corporation (DICGC) and do not offer sovereign guarantee which is the safest possible for a financial instrument in the country. However, liquidity offered by investment in gilts via this route may not match bank FDs. Also, the option of investing in gilt mutual funds exists and offers its own advantages.
Encashing direct investments in gilts quickly could be more difficult than encashing gilt mutual fund units. Direct investment in Gilts can be considered by someone looking for safety of investment of the highest level and who is willing to remain invested till maturity of the instrument. A complete comparison of investing in gilts via mutual funds and via RBI retail direct will be possible only once details of the latter scheme are available.
Individuals will be allowed to open a gilt account within the RBI’s e-Kuber system and directly allowed to place a bid on the government securities, said the RBI deputy governor B. P. Kanungo in the press conference.
Vikas Gupta, CEO & Chief Investment Strategist OmniScience Capital, “Earlier RBI allowed the retail investors to invest in government bonds, however, they were required to hold the bonds till maturity. The latest move is likely to allow the small investors to buy-sell the government bonds before the maturity.”
Gupta further adds, “Government securities are the lowest risk financial instrument available to an investor, apart from bank FDs which are insured for up to Rs 5 lakh. Like other debt instruments, even the government securities carry interest rate risk. Government securities carry the risk of loss of principal if they are sold in the secondary market at the prices lower than they were bought whereas in case of bank FD, a penalty of 0.50%-1% will be levied on the interest rate while keeping the principal amount intact.”
Interest rate risk refers to the potential change in the overall interest rate in an economy. Do keep in mind that there is an inverse relationship between interest rate and bond prices. When interest rates start to rise in an economy, the prices of the bonds currently trading in the market will fall and vice versa.
Currently, 10-year government securities are trading in the range of the 6%. Care Ratings chief economist Madan Sabnavis said, “Getting about 6% return for 10 years is an inferior option compared to investing in 7.15% RBI bonds, which also carry 100% government backing.”
RBI 7.15% taxable savings bonds is a floating rate bond that comes with a lock-in period till the maturity date whereas, the new system announced by the central bank is likely to allow individual investors to sell their government bonds in the secondary market. However, how easy it will be to sell government securities in the secondary market will depend on how liquid the market is.
However, Gupta says, “While choosing an investment option, an investor should go with an instrument offering the lowest risk along with liquidity. Thus, bank FDs with bigger banks and government securities offering an interest rate of 6% will be a better alternative than a corporate bond having higher risk with higher interest rate, in the current scenario.”
Investors should keep in mind that while those investors who do not have understanding of how interest rate and bond price movement work may look for investing via gilt mutual funds. Gupta argues, “An investor should learn and understand how interest rates and prices of bonds move. This will help them to buy-sell government securities from the newly launched platform and also to buy government securities directly from RBI and lock in higher interest rates when interest rates are starting to go on a downward trajectory. During situations like the current period when interest rates are probably at the bottom, it is better to invest in shorter duration bonds of less than 2 years”
Raj Khosla, founder & Managing Director, MyMoneyMantra says, “The move will give small investors access to long-term fixed-income instruments. The move will especially suit pensioners looking for a safe investment option that can give them assured returns for the long term with no reinvestment risk. Till now, the longest instrument was PPF (15 years) but that has a floating rate linked to bond yields. Bank FDs have a maximum tenure of 5-10 years. On the other hand, one can buy 30-year G-Secs. Investors with low risk appetite like retirees can lock-in to long-term bonds.”