Retail investors can now invest directly in government securities. Individual investors can open an account with the Reserve Bank of India (RBI) to invest in government assets through this plan.
What’s on the plate?
RBI-RD is a service designed to entice retail investors to purchase government assets. In February 2021, the RBI recommended launching such a portal.
But what makes this facility so unique?
Gilt mutual funds are now the greatest way for regular investors to purchase government assets. Another option was to purchase it through g-sec dealers, who would compete with other institutional buyers such as mutual funds in the RBI’s primary market auction, which takes place every Friday. However, the BSE and the NSE are good places to go if you want to buy existing g-secs listed on the secondary market. However, these are illiquid marketplaces. On the Negotiated Dealing System platform, your broker can also purchase g-secs and transfer them to your Demat account.
However, there are obstacles. “Investors shied away from G-Secs due to a lack of understanding among small investors, procedural hurdles such as registering a CSGL account with the RBI, and limited liquidity in the secondary market,” says an expert. A CSGL account is a type of Demat account that contains government securities and supports NDS-OM trades. The NSE GO-BID app, which lets you buy g-secs, has eliminated the need for a CSGL account and instead places g-secs directly in your Demat account. However, there is a lack of awareness. The new facility intends to eliminate such annoyances.
“As the fiscal imbalance grows, so does the government’s borrowing to cover it. As a result, the RBI is looking for additional funding sources. As a result, RBI wants individual investors to be able to access G-Secs, broadening the investor pool,” says another expert.
Are G-Secs popular among investors?
Small investors may be hesitant to take advantage of the offer. Small investors seek ‘high return generating’ items to invest in. Although G-Sec carries a low credit risk, it does not deliver high returns when compared to alternative options such as most small savings plans and stocks.
However, some people might be interested in learning more about this possibility. Long-term investors have suffered as a result of recent negative events in perpetual bonds. Long-term g-secs may appeal to such investors because there is no credit risk and the g-secs are widely held by institutional investors,” the expert says.
What about a lack of liquidity?
The major disadvantage of g-sec investing has been the lack of secondary market liquidity in retail lots. If your deal size is substantially less than the ballpark number of Rs 5 crore in the secondary market, you may have to sell it below fair value. Investors should keep an eye on the secondary market liquidity situation following the debut of RBI-RD. Though liquidity is projected to improve over time, experts caution that nothing is certain. He adds that when investing in G-Secs, you should be prepared to hold them until they mature.
Experts believe the RBI will take decisive action to boost liquidity in the secondary market by requiring primary dealers and major institutional investors to engage in the odd lot market. Improving secondary market liquidity is critical to the success of this facility. According to the fund manager stated above, Bond ETFs have seen better liquidity due to market makers.
Should you put money into something?
Though investing in a credit-risk-free investment option is a smart idea, investors must consider a number of aspects. Compare grate sec’s of return with an alternative with nearly no credit risk. A five-year g-sec, for example, can be compared to a nationalised bank’s five-year fixed deposit or the National Saving Certificate. Also, look into pre-emptive exit clauses. Other choices include a premature withdrawal penalty or only allow a partial withdrawal, with the exception of tax-saving fixed income investments. This should be viewed from the perspective of G-Sec retail lots having minimal secondary market liquidity.
Frequently Asked Questions (FAQs)
Q1. What are government securities?
Government securities are sovereign government debt instruments. They sell these items to help support day-to-day government operations as well as specific infrastructure and military projects. These investments function similarly to a corporate debt issue.
Q2. Is it possible for an NBFC to purchase government securities?
NBFC can buy shares, stocks, bonds, debentures, and other securities from the government and local governments, as well as other marketable securities. It could be in the hire-purchase, leasing, insurance, or chit fund business.