By Dheeraj Agrawal, Communication Professional
Very soon, the retail investors like you and me can buy government bonds from RBI directly. A few days ago, The RBI had announced that it would allow retail investors open Gilt or G-Sec accounts with the central bank. According to the RBI, the retail investors will directly access government bonds – both primary and secondary. The platform will be called “Retail Direct”. Individuals will be allowed to open a gilt account within the RBI’s e-Kuber system and directly permitted to place a bid on the government securities.
It is believed that this move will help deepen bond markets in India. Providing retail investors with a direct option to invest in government securities is a good development from a long term perspective. It will not only increase retail participation in government securities but will also improve ease of access. Stock exchanges act as aggregators/facilitators for retail investors, but when the “Retail Direct” mechanism starts operation, there will be no need for such aggregators.
How will it benefit retail investors & government?
The first and foremost benefit is that by opening gilt investment accounts directly, it will be easier for retail investors to invest in government securities than at present. On the other hand, the government will be able to garner more funds from retail investors. In the last few months, retail investors’ participation in the equity markets has seen a phenomenal rise. The government seems to have taken the cue from it to provide an easy route for retail investors to buy bonds.
Why should retail investors buy government securities?
The main attraction of government securities is the sovereign guarantee that they offer. It should be viewed because bank FDs are insured only up to Rs 5 lakh. Though bank FDs are traditionally considered the safest financial instrument in our country, it must be remembered that investment in FDs doesn’t offer a sovereign guarantee.
Who should invest in government securities?
Liquidity is always much better in the case of bank FDs. Still, if you have planned a relatively long term investment coupled with the safest return, the government securities can be considered. It must be remembered that encashing direct investments in gilts quickly could be a difficult task. Therefore, direct investment in gilts should be considered by someone who is willing to remain invested until the instrument’s maturity.
In theory, though, the investors have the option to buy-sell the government bonds before maturity, but due to the interest rate risk and lack of interested parties, it may be easier said than done. According to some financial planners, this step will especially suit pensioners looking for a safe investment option. It can give them assured returns for the long term with no reinvestment risk. Investors with a low-risk appetite like retirees can lock-in to long-term bonds.
What is Interest Rate Risk?
Interest rate risk refers to the potential change in the overall interest rate in an economy. There is an inverse relationship between the interest rate and bond prices. When interest rates start to rise in an economy, the costs of the bonds currently trading in the market will fall and vice versa. Government securities carry the risk of principal loss if they are sold in the secondary market at the prices lower than they were bought.
