Buying sovereign bonds? All you need is a demat account
Interest rates may be on an upwards trend, for now. But it is difficult to predict when the situation may reverse. Many feel that interest rates, over the following years and decades, will only go down.
Interest rates may be on an upwards trend, for now. But it is difficult to predict when the situation may reverse. Many feel that interest rates, over the following years and decades, will only go down. In such a scenario, retail fixed income investors are in a bind.
Debt mutual funds were emerging as good options, but there have been instances where debt funds had to write-off exposure, leading to sharp losses in the short-term. This is why it may be a good time for retail investors to consider investments in Government Securities (G-Secs) as this is the safest investment option available.
Since they carry a sovereign guarantee, G-Secs are virtually credit risk-free and are also available for longer investment duration of up to 40 years. DNA Money brings you details of how you can invest in be a direct G-Sec investor.
Platforms to buy from
Lack of awareness is the primary reason why retail investors have not warmed up to buying G-Secs directly. There is a misconception that direct investment requires lots of money, in lakhs. The fact is you can invest in G-Secs with as low as Rs 10,000. IDBI Bank in 2012 launched IDBI Samriddhi, India’s first online retail G-Sec portal. By 2016, the bank inaugurated its G-Sec investment facility through ATM for retail investors. Axis Bank too has some time ago launched the facility for customers to buy G-Secs directly from Reserve Bank of India. ICICI Securities is one of the first online brokers to offer this investment opportunity through the ICICI Direct platform since May 2018. More recently, discount broker Zerodha launched its service in October 2018. On November 19, National Stock Exchange of India (NSE) announced the launch of its new mobile app and web-based platform ‘NSE goBID’ for retail investors to buy G-Secs.
Using a demat account retail investors can invest in treasury bills (T-Bills) of 91 days, 182 days and 364 days and various government bonds/securities from one year to almost 40 years. In most cases, investment can be done almost every week after a one-time registration. The minimum investment is Rs 10,000 in most cases. After you buy a G-Sec, it is credited within five to seven working days. In case of banks and brokers, you need to be a customer to be able to use their platform to invest. Interest in these government instruments is paid to the bank account linked to demat account.
How to buy
The broker gives the investor access to non-competitive bidding window that exchanges open every week for G-Secs. Once you apply from your account, funds will be deducted from your (investor’s) trading balance. “Bids for T-Bills are collected from Monday to Tuesday and for bonds from Tuesday to Thursday. G-Secs will be credited to your demat upon successful allotment and all interest payments will be credited to their bank account,” says Nithin Kamath- Founder & CEO, Zerodha.
Retail investors will be allowed to bid in the auctions of dated G-Secs and T-Bills, as may be notified from time to time. “Here, the allotment to the non-competitive segment will be at the weighted average price of all allotments to competitive bidders. It enables medium and small investors to participate in the auction process without taking the price risk in auction,” says Anupam Guha, Head Private Wealth, ICICI Securities.
In case of Axis Bank, one can participate in the non-competitive bidding by filling the application form and undertaking from the investor, the bank website says. After successful acquisition of the security, the customer can keep the security in his name in the CSGL (Constituent Subsidiary General Ledger Account) account of Axis Bank in RBI, or, get his/her security credited to existing demat account with a depository participant. IDBI Bank’s Samriddhi portal is available from 10:00 AM TO 2:00 PM on all business days except Saturday and Sunday, according to its website.
Charges and commission
In terms of costs, ICICI Securities charges 0.06% on allotment value + GST, while Axis Bank charges 6 paise per Rs 100 as commission. Zerodha’s brokerage charge is Rs 6 per Rs 10,000 investment. IDBI Bank’s website says it does not charge any service charge or brokerage.
There are advantages of investing in G-Secs. Guha says: “G-Secs come with a sovereign guarantee which no other instrument can offer, thereby minimising the credit risk, as compared to other debt investment options. In the current scenario, a 10-year G-Sec is offering Yield-To-Maturity of around 7.75%-7.8%, while a 364-Day T-bill is offering an yield in the range of 7.15%-7.2%. Notably, the retail bank Fixed Deposit rates in one-year tenor are around 7%, where TDS is also deducted. While G-Secs and T-bills are taxable in the hands of investor, TDS is not deducted at source. This gives an opportunity for the investor to plan his taxation at the end of the year.”
According to Kamath, G-Secs are cheaper compared to short-term mutual funds and this makes them an attractive investment choice.
Tenure of T-Bills are available in 91 days, 182 days and 364 days. T-Bills are zero coupon bonds and issued at discount, where the investor gets face value on maturity. Allotment price of the T-Bill is arrived through auction. “Tenure of G-Sec ranges from two to 30 years depending on what RBI brings for auction. Interest is paid on half yearly basis as per the respective coupon of the bonds. Allotment yield or price of G-Sec is arrived through auction. If the investor holds the securities to maturity, the yield at which the instrument was allotted is what he/she stands to make,” added Guha.
How to exit
Exit options are also important to consider. Exchanges are planning to list these securities on their platform just like stocks in the future. “So far, secondary market exists or selling before the bond matures is not easy, especially for retail investors with smaller investments. However, Zerodha will facilitate a buyback if investors are unable to sell these bonds,” says Kamath.
As of now, these instruments are targeted towards buy and hold investors who are invest in FDs for a regular income stream.
This article was published in DNA as 'Buy sovereign bonds directly, earn high yields'