NEW DELHI: In its effort to deepen the bond market, the Reserve Bank of India has allowed retail investors to invest directly into government securities. Until now, the window to invest in Gilts, as these securities are referred to, was open only to banks, financial institutions, primary dealers, insurance companies, mutual funds and other institutional players.
Gilts are considered as the safest havens for investment, as an individual investor holding a demat account will now have access to RBI’s G-Sec trading platform to invest. So far, retail investors were allowed to take exposure into government securities only through the debt schemes of mutual funds.
Anindya Banerjee, associate vice president, currency derivatives and interest rate derivatives of Kotak Securities Limited said, “We believe the decision to allow retail investors in the government debt market is a step in the right direction as it allows individuals to consider owning a fixed interest bearing low risk investment in their retirement portfolio. At the same time, for individuals looking for interest income, bank fixed deposits still offer a better post tax return. However, bonds can be a better alternative to individuals who are looking to play the rate cycle with a holding period of less than 3 years, short term investors.”
In a country like India, where around 80 percent of savings are channelised into fixed deposits, this will help the government to route some funds in the G-Sec market. The gilt market offers a wide range of product baskets — with different tenures ranging upto 40 years with different interest rates.
Banerjee further added, “However, under current taxation norms, owning interest bearing government bonds can be tax inefficient compared with a gilt mutual fund. For the former, interest income is taxed at a marginal tax rate, whereas for latter, after 3 years of holding, total return (interest + capital gain) is subject to benefit of inflation indexation. We can see some positive bump up in liquidity in government bonds, however, it shall be subject to the trend of the rate cycle.”
Puneet Pal, fixed income head, BNP Paribas Mutual Fund said, “the move will help to deepen the bond market, but there is a caveat that since the ticket size is much higher it may be more preffered by the high net-worth individuals.”
The introduction of another avenue of investment for retail investors, G-Secs hold some advantage against fixed deposits and other small savings schemes. While the public provident fund and EPF continue to be the most tax efficient way of saving for retirement or for the long period as the return generated is tax free, G-Sec could well turn out to be the most favoured option.