The gilt-edge to G-Secs

More than half our household savings that are invested in life insurance policies, pension funds, public provident fund, employee provident fund, post office savings schemes, etc, ultimately find their way into Government securities (G-Secs). G-Secs , issued by the government, are the safest debt instruments in India. However, direct retail investments in G-Secs is low, due to lack of awareness and knowledge.

The recent RBI initiative to encourage retail investors to invest in G-Secs through their demat accounts is a welcome move .

With the fall in interest rates of small savings instruments, one can consider investing in G-Secs for the long run.

However, the interest earned from these instruments is taxable at the marginal rate; long-term capital gains is applicable if the holding period exceeds one year — 10 per cent without indexation (there are no indexation benefits applicable).

A look at ways individual investors can directly invest in G-Secs.

G-Secs are issued by the RBI on behalf of Central and State Governments to meet their debt obligation. It is available for a wide range of maturities from 91 days to as long as 40 years and usually comes with a coupon rate, payable semi-annually.

G-Secs offer the maximum safety as far as the credit risk goes. They carry the sovereign’s commitment for payment of interest and repayment of principal. However, they are subject to interest rate fluctuations, where rise or fall in interest rates in the economy will affect the bond prices. Investors can nevertheless avoid interest rate risk by holding bonds till maturity.

Like any tradeable instrument, G-Secs are initially issued in the primary market and later traded in secondary markets. Since only big ticket transactions are done, institutional investors like banks, primary dealers, insurance companies, mutual funds, provident funds are its major buyers and sellers.

Earlier, the RBI required individual investors to maintain a ‘constituent subsidiary general ledger’ (CSGL) account or Gilt account with the banks or primary dealers (PDs). And the latter bought/sold G-Secs on behalf of the investors with minimum trading lot of ₹1 lakh. The amount was later reduced to ₹10,000.

The banks and PDs charge a commission up to 6 paise per ₹100 worth of transaction.

The goods news for individual investors is that from August 2016, the RBI has announced that individual investors who maintain a demat account with either NSDL or CSDL can have access to the Negotiated Dealing System-Order Matching (NDS-OM) without having to open another gilt account with the Primary Dealer. NDS is a designated exchange platform for conduct of primary and secondary market transactions in G-Secs.

The RBI has urged all banks and PDs to provide direct web-based access to individuals to transact on the NDS platform. But currently, only IDBI bank provides such facility through its portal ‘IDBI Samriddhi’.

Through the portal, individuals can buy G-Secs for a minimum of ₹10,000 and in multiples of that thereafter. However, there is a maximum limit of ₹25 lakh. Investors can make a purchase or sell request through the portal on any working day between 9 am to 2 pm. While in case of purchases, the security will be credited to the customer’s demat account on a T+1 basis, redemption proceeds will be credited on T+2 basis. One can invest from ₹10,000 to ₹25 lakh face value denomination through the portal.

Recently, IDBI Bank launched the facility of investing through its ATM. However, for getting this facility, the customer needs to have saving/current account as well as demat account with IDBI Bank. Currently, there is no fee for purchases made through its portal or ATM.

Moreover, investors can instruct their Depository Participants to place orders on their behalf on the NDS-OM trading platform. They can even call their brokers and ask them to execute the trade on their behalf. If all the methods seem complicated, there is the mutual fund route.

Gilt mutual funds scores over investing in direct G-Secs by providing indexation benefit if sold after three years. The capital gains on gilt funds are taxed at 20 per cent with indexation.

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