Now, with retail investors given direct online access to gilts, not only is the investors’ base likely to increase but individuals will get another investment debt avenue to diversify their investment.
In a major structural reform, the Government of India launched a Retail Direct Scheme in November for individuals looking to invest directly in the sovereign bond market.
Under this scheme retail investors can open and maintain the Retail Direct Gilt (RDG) account online with the Reserve Bank of India through the apex bank’s online portal.
Until now, only institutional investors such as mutual funds had access to government securities (gilt funds) and a pooled amount of retail investors was invested in the sovereign bonds through institutions.
The costs of institutional investments were also high with bonds priced at tens of lakhs or crores of rupees, being outside the reach of small investors. Now, with retail investors given direct online access to gilts, not only is the investors’ base likely to increase but individuals will get another investment debt avenue to diversify their investment.
Here are 7 things you need to know about the scheme.
- Zero Cost
Opening an RDG account is absolutely free and involves no market intermediaries. A free of cost facility by the RBI would help reduce the overall transaction charges for retail customers, which they otherwise are required to pay for investing through aggregators or taking exposure in G-Sec through debt mutual funds.
- Direct Access To Primary & Secondary G-Secs
Once registered on RBI’s online portal and getting an RDG account, individuals can buy G-Sec directly in the primary market whenever new bonds are issued by the government. Instead of having to spend lakhs or crores, small investors can bid as little as Rs. 10,000 to buy these bonds. In addition to it, they can buy or sell their holdings in the secondary market by using RBI’s screen based, anonymous electronic order matching system for trading activities. In short, it will be as easy as buying and selling shares using online portals or mobile applications.
- Documents Required To Open RDG
You need to furnish such details as your bank account, PAN, Aadhaar for verification of identity and address, your phone number linked to Aadhaar and your email address. Non-resident retail investors are eligible to invest in the scheme under the Foreign Exchange Management Act (FEMA).
Only one RDG account can be opened by an individual, either single or joint, provided the second holder meets the eligibility criteria. Moreover, the second holder can also open an individual RDG account separately.
- Instruments to invest in through Retail Direct platform
There are four types of government securities an investor can invest in through the Retail Direct Scheme. They are Government of India Treasury Bills (T-Bills), Government of India dated Securities (dated G-Sec), State Development Loans (SDLs) and Sovereign Gold Bonds (SGBs). As mentioned, you’ll need to invest a minimum of Rs. 10,000 as per current norms, while for SGBs the minimum purchase has to be of one gram of gold.
- Benefits of Investing in G-Secs
G-Sec instruments offer an option for long term investment for the retail customer. In the context of the domestic market, government-backed instruments are risk free and carry no credit risk. In terms of return, G-Secs offer decent yield for a longer duration as the yield curve stretches up to 40 years. With the government issuing securities at different points on the yield curve, G-Secs offer an attractive option for investors whose risk appetite is low.
- Risks factors in G-Sec investments
Typically, G-Secs are credit-risk free instruments in domestic currency. Having said that, there could be market related risks attached to this investment if an investor sells before maturity. Further, the returns on such instruments are dependent on several features of the securities and market conditions. It is worth noting that there is an inverse relationship between bond prices and interest rate. This essentially means that when interest rates moderate or are low, there is a better prospect of capital gains in G-Sec investments. However, one must be conscious of market risks emanating from the losses in bond prices if the interest rate cycle reverses.
- Who Should Invest?
Investors with a very conservative investment approach having low risk appetite in the long term should look for RDS. At times, the returns from G-Sec may not even beat inflation, making return net negative or net neutral. However, the risk of losing the cost of investment is fundamentally absent as these securities are backed by the central or state governments. For conservation of investment value, RDS could be the best choice. However, when interest rate cycle is downwards, returns from G-Secs may be much higher than the long-term average. This product may not be suitable for aggressive investors who look for high growth in their investment and have high risk-taking ability.
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