There has been much buzz around investing in Government securities (G-secs) ever since the RBI Governor proposed to allow retail investors to invest in them through the central bank . As of now, you can invest in G-secs via broking firms such as ICICI Securities, HDFC Securities and Zerodha and NSE’s goBID platform.
While direct investing may make it easier , this alone may not be enough to nudge retail investors to jump in.
Not completely risk-free
No risk of default by the Government makes G-secs immune to credit risk. But they are exposed to interest-rate risk, just like other tradeable bonds. When interest rates rise, or expected to rise (fall), G-sec prices can fall (rise) leading to a capital loss (gain).
You must be prepared to see the value of your investment in G-secs going down if interest rates start to pick up. This will, however, be only a mark-to-market loss (and will not be a realised loss) unless you sell the G-secs. So, if you hold them until maturity, you can avoid the capital loss, if any.
Understanding yield
The RBI conducts auctions of G-secs (Government-dated securities with original maturity of one year or more) where institutional investors can place competitive bids for them, and retail investors can apply for allotment. Retail investors must invest a minimum of ₹10,000 and are allotted G-secs at the weighted average price arrived at, in the competitive bidding process. G-secs pay half-yearly interest (coupon), calculated on face value.
Let’s take RBI’s auction conducted on February 18as an example. The ‘5.15% Government Stock 2025’ refers to a batch of G-secs paying 5.15 per cent coupon rate per annum (paid half-yearly) and maturing in 2025. The weighted average price for these G-secs arrived at the auction was ₹ 98.18. That is, the bond price is ₹981.8, and on maturity, the face value of ₹1,000 will be paid.
If an investor holds the bond till maturity, then his return will be indicated by the YTM (yield to maturity) which accounts for not only the coupon payments but also the purchase price of the bond. In our example, the YTM is around 5.59 per cent. Since the bond was issued at a discount to face value (₹981.8 versus ₹1,000), the YTM is higher than the coupon rate.
Another recently auctioned G-sec, ‘5.85% Government Stock 2030’ is offering a YTM of only around 6.06 per cent. Also, as with other bonds, once the G-secs get listed, then as their prices change, so will their YTMs (from what they were in the auction).
Not always attractive
Today, based on data from the RBI auctions (primary market) and the already listed Government bonds (trading in the secondary market), we can see that G-secs yields (YTMs) are quite low. There are other fixed-income options that can offer you a better deal.
For example, based on aggregated data from the secondary market, three-year G-secs are offering a yield of 4.88 per cent. Compared to this, public sector banks are offering 4.9 to 5.5 per cent per annum on their three-year fixed deposits. Private sector bank FDs too will fetch you better rates. Three-year post-office deposits, which carry no risk of default, are offering 5.5 per cent per annum.
Similarly, five-year G-secs are offering a yield of 5.69 per cent. The equally safe five-year post-office deposits and Senior Citizen Savings Scheme (the latter usually for those 60 and above) are offering a higher 6.7 per cent and 7.4 per cent, respectively.
Unlike G-secs, bank fixed deposits and small savings schemes (post-office time deposits and senior citizen savings scheme, to name a few) come with a few years’ minimum lock-in period. However, given the lack of liquidity in G-secs in the secondary market, the absence of a minimum lock-in period can hardly be considered an advantage. Also, interest (coupons) income from G-secs is taxed at an individual’s income tax slab rate as is the case with the interest income (paid out or accumulated) from the other options mentioned here.
Don’t lock into low yields
If one were to look at longer periods, here too, a yield of 6.67 per cent pre-tax (and lower once you apply the relevant tax slab rate) on 15-year G-secs is less attractive than the tax-free 7.1 per cent offered by Public Provident Fund (PPF). But you can invest only up to 1.5 lakh a year in PPF.
It is likewise for other G-secs too. For instance, the 6.52 per cent yield (January-end 2021) on 30-year G-secs is well below its 10-year average of 7.82 per cent. By investing in such long-term G-secs today and staying put until maturity, investors will lose out on a better long-term return, once rates start moving up. Hence, timing is important when you invest for holding until maturity.
“The government and the RBI need to create liquidity for retail investors to enable premature exit,” says Deepak Jasani, Head of Retail Research, HDFC Securities. According to him, this can be done by promoting market making in them, at least initially. Also, a window for premature encashment at the prevailing yields, subject to a maximum of the face value, can be offered.
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