RBI allows direct investment in government securities. Should you invest?

Following the launch of the 'RBI Retail Direct Scheme', you can now invest directly in government securities (G-secs) by opening an account with the Reserve Bank of India (RBI). The scheme was launched by the Prime Minister Narendra Modi on November 12, 2021. It has been considered as one of the landmark moves, as earlier retail investors were not allowed to invest in G-secs directly.  

Let’s understand what are G-secs and some of the other options available.

G-secs are backed by the central government and do not carry any credit risk but carry interest risk. Therefore, when you invest in government securities you need to be mindful of the interest rate cycle and maturity of the government securities. For example, if you hold a long term bond with an interest rate of 7 per cent and if the interest rate goes up to 8 per cent, the value of your bond will reduce. The longer the duration of the bond, the higher is the impact on the bond price.

“Investing in G-Secs always carries interest rate risk as they are long term debt instruments. Hence investors need to have a reasonable understanding of the interest rate and its outlook. The longer the maturity, the higher is the interest risk. Investors investing on their own in G-Sec need to follow a careful approach. In debt funds, this interest rate risk persists, but the portfolio is managed by experienced fund managers who build the overall portfolio based on their expertise,” said Harshad Chetanwala, Co-founder MyWeathGrowth.

Moreover, experts say low secondary market liquidity in retail lots has been the biggest drawback of investing through direct platform. “The best way for retail investors to buy government securities currently is through gilt mutual funds,” said Viral Bhatt, founder, Money Mantra.  

Gilt funds are debt mutual funds that invest at least 80 per cent of their assets in government securities. The entry and exit time is crucial in these schemes because of interest rate sensitivities. They work well in the falling interest rate regime, as bond prices rises during the period. Over the past one year gilt funds have given the average return of 3 per cent.

Comparison with small savings schemes  

Currently, PPF offers 7.1 per cent per annum with complete tax-free returns. Similarly 5 Years National Savings Certificate offers 6.8 per cent compounded annually but payable at maturity. Compared to this the return on the current 10 year GOI bond is around 6.10 per cent whereas a 3 year GOI bond will provide return of approximately 5.10 per cent. Given the higher interest rate, the scale clearly tilts towards small savings schemes.  

“Small investors look to invest in ‘high return generating’ assets. G-Sec, though comes with little interest risk, but they do not offer great returns compared to other avenues such as most small saving schemes,” said Bhatt.

The interest rate outlook is important to consider before investing. “Some small saving schemes have a fixed interest rate at the beginning of the investment and some are decided every quarter, but the interest rate risk is limited in small saving schemes. Hence, investing in G-Secs should be done with the help of insights on the interest rate scenario even though there is no default risk as these instruments are backed by the Government,” said Chetanwala.

Experts say investors should compare the rate of returns along with liquidity and taxability before parking their money for long tenure. 

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