Tag: govt bonds

How good is G-Sec as an investment option

Personal Finance

[ad_1]

Read More/Less


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.

(This is a free article from the BusinessLine premium Portfolio segment. For more such content, please subscribe to The Hindu BusinessLine online.)

[ad_2]

CLICK HERE TO APPLY

Leave a comment , , , , ,

G-Sec: How direct online access will help you

Personal Finance

[ad_1]

Read More/Less


RBI Governor, in the recent Monetary Policy Committee meeting, announced that retail investors will be allowed online access to the government securities (G-Sec) market – both primary and secondary – directly through the Reserve Bank of India. According to the Central Bank Governor, India will probably be the first country in Asia to introduce this facility.

Investing in the G-Sec market by retail investors is still at a nascent stage in India. If you are wondering how the current system of retail investing in G-Secs works and how the RBI’s proposed initiative will enhance your experience, here are some details.

While the fineprint of the scheme is still awaited, we attempt to answer some questions that may commonly arise.

The Government issues securities called G-Secs to borrow money from the market.. Such securities can either be short term or long term. Short-term instruments with a maturity of less than a year are usually called treasury bills. Long-term securities with a maturity of one year or more are called government bonds. The government pays a specified coupon or interest rate on these bonds, which is usually paid annually or semi-annually.

Can retail investors invest in G-Secs?

Yes. Generally, RBI conducts auctions when the Government wants to borrow, and issues securities for this purpose. To allow retail investors participate in the primary issues of G-Sec, the RBI in 2001, introduced non-competitive bidding.

Till then, the auctions were conducted only on competitive-basis, in which the investors need to bid either in terms of the rate of interest (coupon) or price of the security. Since this process is technical, only large and informed investors, such as, banks, primary dealers, financial institutions, mutual funds, insurance companies generally participated.

Under the non-competitive bidding, about five per cent of the borrowing amount is reserved for retail investors.

The allotment under this segment is at the weighted average rate that emerges in the auction on the basis of competitive bidding by large investors. Thus, retail investors don’t have the option to decide the price of the security that is being bought. They have to bid the investment amount along with the application.

If the aggregate amount bid from all participants is more than the reserved amount for non-competitive bidding (about 5 per cent), allotment would be made on a pro rata basis.

But if the aggregate amount bid is less than the reserved amount, all the applicants will be allotted in full.

What is the route to investing in G-Secs for retail investors currently?

Over the years, the entire process of buying G-Secs by retail investors in the primary market has become a lot simpler.

Earlier, the RBI required individual investors to maintain a ‘constituent subsidiary general ledger’ (CSGL) account or Gilt account with the banks or primary dealers (PDs). Now, one can participate in the G-Sec auction in the primary market through a demat account.

ICICI Securities, HDFC Securities, Zerodha and NSE’s goBID are a few options through which retail investors can use their demat accounts to invest money in T-Bills or government bonds.

The minimum and the maximum investment is Rs 10,000 and Rs 2 crore per security per auction. The brokers or facilitators may charge up to six paise per Rs.100 as commission for rendering this service to their clients.

Note, while investing in the G-Sec seems simple, selling the security before maturity may not be easy. The RBI opened up the secondary market in G-Secs for individual investors, a few years back, but the liquidity in the market is a major issue.

Are there any risks in investing directly in G-Secs?

Backed by the Government, G-Secs do not carry credit risk, but are vulnerable to interest rate risk.

That is, while there is no risk of payment default by the government, any change in interest rates in the economy can impact the value of the G-Secs you hold.

But this risk arises only if you decide to sell the instrument before maturity, in the secondary market, which also suffers from the lack of adequate liquidity.

Also note that your returns on direct investment in G-secs will depend on the price at which the securities are allotted to you.

So, it may be difficult for a retail investor to grasp the nuances of the return that G-Secs will fetch and compare them with other fixed income instruments in the market.

What has changed with the RBI Governor’s new announcement?

Clearly, providing access to the G-Sec market to the retail investors is not something new.

The RBI’s recent announcement is about opening a gilt securities account directly with the RBI and providing online access to the G-Sec market (both primary and secondary) without the intervention of any intermediary. Through ‘Retail Direct’, the RBI aims to increase retail participation in G-Secs.

In terms of direct access to G-Secs, we hope it will be user-friendly. To give some perspective, the current mechanism to buy corporate bonds or stocks is more investor-friendly than the procedure of buying Floating Rate Savings Bond from the RBI.

Will this move be a game changer?

Well, to say that, we need to wait for the fineprint.

Deepak Jasani, Head of Retail Research, HDFC Securities says, “The current option of retail investing in G-Secs has not taken off well. The liquidity issue in the secondary market if one wants to exit and the less-attractive tax incidence on direct investing in G-Sec compared to investing in gilt funds (that attracts capital gains tax) could be few reasons for the weak participation. RBI’s new initiative will help if these issues could be sorted.”

[ad_2]

CLICK HERE TO APPLY

Leave a comment , , , ,