WHAT HAS HAPPEN..?
The Reserve Bank of India (RBI) in February said it will open up government bonds for small investors under 'RBI Retail Direct'.
WHAT IS RETAIL DIRECT SCHEME..?
Individual investors can open Retail Direct Gilt (RDG) Accounts with RBI to buy government bonds.
The bonds on offer are government securities (G-Secs) issued by the central government, state development loans that are bonds issued by state governments, and sovereign gold bonds issued by the central government but whose price is linked to gold.
- You can buy and hold these bonds to maturity, earning regular interest.
- You can also sell the bonds before maturity in the secondary market.
- Since they are issued by central and state governments, the default risk is extremely low.
HOW WILL THE RBI SCHEME WORK…?
- To register online, investors need to have a rupee savings bank account in India, PAN and a valid document for KYC.
- Non-resident retail investors are eligible to invest in government securities under Foreign Exchange Management Act, 1999.
- An RDG Account can be opened singly or jointly. Investors fill up an online form.
- Once their RDG Account is opened, details for accessing the portal will be conveyed through SMS/email.
- No fee will be charged for opening the account or placing bids. For primary market participation, only one bid per security is allowed.
- Payment can be made through net-banking/UPI. Allotted securities will be issued by credit to the investor’s RDG Account on the day of settlement.
- The RBI will announce the date of commencement of the scheme.
- G-Secs add to the variety of debt investment options.
- Apart from interest income, investors can also make capital gains by trading in gilts, depending on the trajectory of interest rates.
- If an individual holds a bond carrying a yield of 6%, a rise in bond yields will bring the price of the bond down.
- On the other hand, a drop in yield below 6% would benefit the investor as the bond price will rise.
- Investors also face low reinvestment risk in case they are saving for retirement.
- While fixed deposits are available for a maximum tenure of 10 years and thereby expose the investor to reinvestment risk, a G-Sec investor can lock himself at the current yield for 20-30 years.
WHAT ARE THE RISKS?
Since G-Secs are highly volatile, investment experts say investors who really understand these instruments or are willing to hold till maturity should look at them.
Many argue that although these are safe-asset class, it is better to invest through mutual fund schemes that invest in G-Secs.
For investors who are willing to hold till maturity and are not bothered by volatility, one of the advantages of going direct is that they will save on the expense ratio charged by mutual funds.
G-Sec attracts tax on both interest income and capital gains if the papers are traded in the market before maturity.
Interest income attracts tax at the marginal tax rate, and capital gains at 10%.
G-Secs don’t attract capital gains tax if the papers are held till maturity.