There is a very reassuring word in Fixed Income Market which is “Sovereign Backing” meaning that the security or the Bond is backed by the government, hence has the least possibility of default. These are called Government Securities or Gsecs by market participants. But you know there was no viable means to buy these securities by the general public at large. But coming next week Government has allowed this. Yes, a retail investor can buy and trade these securities from some time now.
What 
was the problem…
The first issue was that Gsecs had a very big lot (Rs 5 Crore), which is not possible for a small or mid-size investor. The second problem was a tedious route or paperwork. Only Primary Dealers were allowed to trade, hence you had to approach them, get an SGL (Statutory General Ledger) account opened, wait for auction … blah blah, a long process which was not at all feasible.
What are the changes now?
Well, the good news is if you have a Demat account (with NSDL or CDSL), you will be able to buy or trade Gsecs very soon. This will happen due on the RBI-managed Negotiated Dealing System-Order Matching (NDS-OM) platform.
All banks (Your bank too) and primary dealers (PDs) of G-Secs are already members of the NDS-OM and retail investors can route their buy and sell orders through them. G-Secs are usually held in subsidiary general ledger (SGL) accounts. Once your order is executed through banks or PDs, the Clearing Corporation of India will convert the SGL to demat form and transfer it to individual demat accounts.
What are the benefits?
- We all know that bank deposit maximum tenure is 10 years (which they seldom tell), but with Gsec you can fix your amount for 20 or 30 years.
- You can buy with small amounts. So can built a portfolio using these as investments.
- Best for pensioners who are looking at constant income for a long
- No penalty on premature withdrawal as you have to just go the system and sell your Gsecs.
- Medium term rates (3 years to 10 years) are better than the bank FDs historically. Refer picture below.
(Image is taken from economic times website dated 08/10/2016)
What’s the catch?
Since the system has just started, so there will be some cooling off period before the procedure gets seamless. Few observations are:
- Not all equity brokers are registered as Primary Dealers, so they will take a time to get registered.
- Only IDBI bank has a front end process (IDBI Samridhi), so other banks will rush to introduce their system after Aug 16,
(I shall keep adding details of what I will know post-Aug 16, 2016 on this topic)
What should you be ready for?
- The Gsecs will be available for trading too (Just like the secondary market for shares), hence the prices will be very volatile. So don’t expect Fixed Deposit kind of environment.
- The taxation will be as of FDs as Gsecs also pay interest. Hence no indexation benefit.
- Capital Gain treatment are also to be considered for eg Rs 100 bond bought at Rs 90 from the secondary market you will incur a capital gain of Rs 10. Whereas for similar interest paying bond bought at Rs 110 will give you a capital loss of Rs 10 at the trade itself.
- G-Secs pay interest half yearly (July and Jan) only. So no regular monthly or quarterly flow.
- The expenses (buying/selling and demat) will be very less in comparison to G-Sec funds by mutual funds.
Gsecs Directly or Gsec MFs?
Following things will be the differentiating factors
- Minimum investment in Gsec directly is Rs 10k but in MFs you can do a SIP of Rs 500.
- You have to do more research yourself or hire an advisor. Fixed Income is tougher than equity. And this is the reason majority agents do not recommend debt products.
- Indexation benefit is available on Gsec MFs, which is a tax advantage, especially to high tax bracket investors.
- G-Sec securities have a high interest-rate risk (means their price fluctuate a lot when RBI changes rates). In MFs this risk can be controlled by changing/altering maturity of the portfolio. When you purchase Gsec directly, this may not be possible at investor’s front.
Are you excited to participate and invest in Government Securities? The market has seen many attempts to facilitate retail participants in past too. Will this one succeed? Share your comments below or ask any question that comes to your mind.
Is there some error in the statement you said about Capital Gain treatment- when one buys at ₹90 is that not a gain & when bought at ₹110 is not a loss.
What I Understood is – Tax free bonds offered intermittently could be better option than the proposed retail GSecs, which are not tax friendly & require well informed. What impact this change would make on Banks offering FDs is to be seen, as this would be new addition to their existing competitors, like NCDs & FDs of NBFCs or Company FDs- now at least they should remove penalty clause for premature withdrawal. The only distinct advantage is secured investment with longest tenure. Why not then invest the accumulated corpus – like the Pension Fund, these rather than taking a pension plan or gradually. EPFO, NPS may actively consider this, in addition to their current strategy of investing in Equities- where they tend to follow ” Invest & sit tight”
Dear Shrikant,
Thanx for pointing out. Yes, it was a mistake and I have corrected it in the post.
You correctly mentioned that Buying GSec and Trading Gsec will be two different ways and trading will require a lot of study and practice. Tax-free bonds and long-term FDs were the two options if someone wants to buy and sit for long. Now this can be one more option considering it will have the highest rating. EPFO and NPs are already investing in Gsecs as they are allowed to trade directly. This is something futuristic too, as very soon days will come when you will be accumulating and buying annuities yourself (not depending on EPFOs or NPS). That time this option will be handy for fixed income investors.
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