To provide retail investors easy access to the government bond market, the Indian central bank is all set to unveil the RBI Retail Direct Scheme on Friday, November 12. Prime Minister Narendra Modi The much-awaited plan will be unveiled on Friday through video conferencing. Under the RBI Direct scheme, retail investors can easily access the government securities market – both primary and secondary online, the central bank mentioned earlier. The RBI Retail Direct Scheme will also allow investors to open and maintain their Gilt Securities accounts online with RBI without any additional charges. (G-sec).
What are G-secs?
Government securities are debt instruments (bonds and treasury bills) issued by the Reserve Bank of India on behalf of the central government. The state government can also issue such instruments, which are known as state development loans. There are two types of government securities – 1) Treasury bills with different tenors of 91, 182 and 364 days 2) Long term government securities which can mature in 5-40 years.
Treasury bills may be available at a zero coupon (interest) rate and are issued at a discount to the published face value of a government security. Once they mature, they can be redeemed at their face value. Government securities, on the other hand, are long-term investments where the interest is usually paid twice a year for a specific period of time. From now on, you can easily buy any of these bonds directly from the primary and secondary market.
Government Securities: What are Credit Risks?
G-Secs are the most liquid of all instruments in the debt market and carry no credit risk as the central government is the borrower. Since the government usually does not default, gilt funds do not carry credit risk. However, government securities are completely risk free instruments. G-Sec funds carry interest rate risk. Generally, G-Sec funds invest in securities that mature over a longer period. The price of government securities is inversely correlated with interest rates. If interest rates rise, bond prices fall and vice versa. While investing in G-Sec funds, investors should keep this interest rate risk in mind. However, experts recommend holding government securities till maturity to reduce this risk.
tax on government securities
Interest paid on government securities is fully taxable. If the investor sells it after one year, there will also be a long-term capital gain at the rate of 10 per cent. If you sell them before holding them for one year then marginal tax slab rates will be applicable.
how to invest in government securities
Under the RBI Retail Direct Scheme, there will be a dedicated portal for investing in Central Government Securities, Treasury Bills, State Development Loans and Sovereign Gold Bond Scheme. Investors will have access to the central bank’s trading platform for government securities, called the Negotiated Dealing System-Order Matching Segment, or NDS-OM, to bid in primary auctions as well.
Should you invest in government securities?
Government securities are often considered a safe option for a person who wants to invest money in a safe instrument for a long period of time to earn interest. Since the risk is almost zero, the returns are also low. Low-risk gilt funds generally offer lower interest rates than other fixed-income instruments like fixed deposits and small savings schemes. The 10-year G-Secs, which are considered a benchmark, are currently yielding 6.27 per cent. It is advisable to invest in government securities only if the investors are planning to hold it till maturity. Retail investors have mostly avoided government securities in the past in search of higher returns on their fixed income investments.
“The scheme was termed as a major structural reform by RBI Governor Shantikanta Das in February 2021. The scheme will enable retail investors to open and maintain their government securities account free of cost. Nitin Mathur, Chief Executive Officer, Tawaga Advisory Services said, Government securities are basically government-issued loans that provide safe and guaranteed returns to investors at the time of maturity.
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