The Reserve Bank of India (RBI) in its most recent monetary policy meeting has decided to permit retail investors to participate in government securities by opening an account with it.
Let us talk about how it will work and regardless of whether retail investors will genuinely participate in it.
What is the proposal
As per the RBI choice, men and women will be permitted to open a gilt account via the RBI’s electronic platform. The retail investor will be capable to acquire and sell government securities on the web via this platform. The precise modalities on how this will function are however to be produced obtainable by the RBI. This will support expand the scope of items obtainable to retail investors to invest in fixed revenue instruments. This will also support the government in its strategy to borrow from the industry due to a wider participation in the safety sale by the government.
Who ought to participate in it
As far as the query as to who ought to avail this facility is concerned, in my opinion the retired persons who have to have frequent revenue for day-to-day expenditures ought to invest by opening an account with the RBI. Moreover, all these who want to invest in fixed revenue items and do not want to take any credit threat ought to also participate in it as and when the program becomes functional as it gives you the sovereign assure on your investments. One can also contemplate investing in government securities, one’s portion of debt to guarantee correct asset allocation of the portfolio.
For non-salaried, there are only a couple of items obtainable for fixed revenue items, except PPF exactly where one can invest only upto Rs 1.50 lakh every single year. Senior citizens have further avenue of investing in “Senior Citizen Savings Scheme” and “Pradhan Mantri Vaya Vandana Yojana” exactly where they can have investments upto only Rs 15 lak at any provided point of time in each and every of the schemes. Though retail investors have the alternative to invest in RBI floating price savings bonds yielding presently 7.10% interest. Investments in these items can yield superb returns specially when the investments are produced in longer duration government securities when the interest prices are at their peak. However, because these have a lock-in period ranging from 5 years to ten years, they are not appropriate for investors who want to play on interest price cycle and for whom this platform will provide chance to play on interest price cycle in completely secure investments.
Will it work?
In my opinion, important retail participation is not going to take place quickly due to absence of basic awareness about the availability of such an alternative. This is evident from the level of participation in mutual fund items as compared to the funds kept with the banks as fixed deposits. A substantial monetary investment as a proportion of savings is held in bank deposits and not even in mutual fund items about which there is fair awareness in the public. Since the important to results of retail participation in any monetary item is awareness, the government wants to educate retail investors about the nuances of the government securities industry via aggressive campaigning.
The choice of the RBI to permit men and women to open an G-sec account with it is a great choice, but in my opinion it will not have broad-based participation from retail investors. Only the HNIs (High Net Worth Individuals) will be capable to avail the advantage of this facility to invest in the government securities.
Presently the RBI floating price savings bonds offer you 7.15% price of interest without the need of there getting any limit on the quantity one can invest in these bonds. Against this, the yield on government securities is about 6% only and as a result in all likelihood retail investors who have a time horizon of at least seven years will favor investing in the saving bonds and not in the government securities. However, this platform will provide investment avenues to these who have a time horizon of much less than seven years and who want to trade in their fixed revenue items to avail the advantage of interest price cycle.
Let us wait for the modalities for retail investors to participate in the scheme.
(The writer is a tax and investment specialist, and can be reached at [email protected])