Safety’ and ‘risk’ are the two most important terms in the investment world. If you delve deeper and talk to more learned people in the financial markets, they go with the phrase ‘greed and fear’. There is always a quest for safety when it comes to money.
Most Indians love to own tangible assets. Something they can see or hold in physical form. Gold and property account for nearly 80 per cent of assets in Indian households.
When it comes to safety, a sovereign bond can be called as the safest financial instrument. This is an instrument that the government uses to borrow money from the market for expenditure. These are also called government bonds or securities or G-Secs. It simply means that you are lending money to the government at a pre-determined interest rate. It is called the coupon rate. The interest rate guarantee given by the government cannot fail. If the government fails to pay you the interest rate, it means the country has collapsed. This, hence, can be called a safe investment.
From time to time, the Reserve Bank of India auctions treasury bills or T-bills of varying maturities or time frames.
Thus far, these government securities were mostly bought by only large banks looking to keep their surplus funds or to meet the capital adequacy rules. These rules mandate that banks set aside a portion of every rupee they lend. There are debt mutual funds that put unitholders’ money into government securities. Nearly half of the mutual fund money of `25 trillion (`25 lakh crore) is invested in these securities. So, if you own a debt fund or a balanced fund, you are indirectly holding government bonds or lending money to the government.
What is new then?
Recently, stock exchanges like the National Stock Exchange and the Bombay Stock Exchange have launched an app that allows retail investors to buy government securities directly. You can use your trading and Demat accounts to submit your bid in the primary market, just like an initial public offering of equity. You will be notified if you are allotted a bond. A trading or Demat account is mandatory to apply for these bonds.
The interest amount is directly credited to your bank according to the applicable coupon rate every year. There is no tax deducted at source unlike a fixed deposit, according to information available.
However, you can buy only when the government announces an auction of the bonds in the primary market. There is a secondary market where these bonds are listed, but the trading activity in bonds is largely institutional. Also, market lots are not like equity and easy to buy or sell for an ordinary investor. This may change if more retail investors buy government bonds though. For now, it is an illiquid secondary market. That means, once you buy a government bond of 1 year or 3 years or 5 years or 10 years, you may have to hold on to it.
What it means really
The popularity of gold tops most other assets. The Indian public owns three times more gold than America, which is the largest sovereign accumulator of gold at over 8,000 tonnes. Even if some portion of that money comes into financial instruments like government bonds, it can make a huge difference to the retail bond market and give it a depth. A vibrant secondary bond market is something India needs to fuel future economic growth. If the government and quality businesses can borrow money from financial markets swiftly, it will also give space to banks to fund future growth projects.
This opens a great avenue for the people who are worried about risks in financial markets. Government bonds are the safest financial instruments. If you have surplus cash from inheritance or property sale, you may want to consider parking your money into these instead of hunting for another property. If you own a lot of gold, you may want to consider selling a part of that investing and putting it in the government bonds instead.
From an ordinary investor’s standpoint, the government bond market can be that ‘guaranteed’ return investment that you always seek. This is because it is backed by a sovereign guarantee.
(The author is a publisher and founder at Simplus Information Services Pvt Ltd)