Get Investing. Buying G-Secs just got simpler

Government bonds are ideal for retail investors looking for safe, fixed returns over the long term. But investing directly in government bonds has not been easy. The RBI’s move last year to allow specified stock exchanges to act as aggregators/facilitators for the small investor has made direct investing in G-Secs a lot easier.

The NSE recently launched its mobile app and web-based platform ‘NSE goBID’ for retail investors to buy government securities. ICICI Securities and Zerodha too allow direct buying of G-Secs through their platforms. A look at what’s on offer.

Some basics

Government securities include Central Government securities, Treasury bills and State Development Loans. G-Secs are available both in the primary and secondary market. In the primary market, they are issued through auctions conducted by the RBI. There are two types of auctions — competitive and non-competitive.

In a competitive bidding, an investor bids at a specific price or coupon rate. Competitive bids are made by well-informed investors such as banks, financial institutions, primary dealers, mutual funds and insurance companies. Non-competitive bidding was introduced to provide an opportunity for retail investors, who lack knowledge, to participate in the auction directly. Under this, certain amount is reserved for retail investors.

The price a retail investor pays is decided by banks and other financial institutions that participate in the competitive bidding process. The price discovered here — also called the weighted average price — is the price the retail investor pays to invest in the T-Bill or G-Sec.

Easier to operate

Until now, small investors’ participation in the G-Sec market has been minimal, given the lack of awareness and procedural issues in investing directly in G-Secs.

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). Buying, thus, had to be routed through banks or PDs.

From August 2016, the procedure became a tad simpler. The RBI allowed demat-account holders with either NSDL or CSDL to buy/sell G-Secs on the Negotiated Dealing System-Order Matching (NDS-OM) — essentially in the secondary market.

But only a few banks offered such a facility. IDBI Bank, for instance, through its portal ‘IDBI Samriddhi’ offers G-Secs for a minimum of ₹10,000 up to a maximum limit of ₹25 lakh. Axis Bank allows you to buy G-Secs in the primary market.

The customer can keep the security in his name in the CSGL account of Axis Bank in RBI or get his/her security credited to the existing demat account with a depository participant.

,However the entire process of buying G-Secs by retail investors in the primary market has become a lot simpler this year, with various players offering the facility through exchanges as aggregators. ICICI Securities, Zerodha and NSE’s goBID are few options through which retail investors can use their demat accounts to invest money 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.

The exchanges open a non-competitive bidding window every week for G-Secs. Bids for T-Bills are collected from Monday to Tuesday and for longer-dated G-Secs, from Tuesday to Thursday. G-Secs will be credited to your demat upon allotment and all interest payments to your bank account. Under NSE’s recently launched ‘NSE goBID’, once the bids are collected and the price is determined by the end of the week (by Friday), the securities are credited to your account on Monday (following the week in which the bid is placed).

The minimum investment is ₹10,000, up to a maximum of ₹2 crore under NSE goBID. Axis Bank and ICICI Securities currently charge 6 paise per ₹100 as commission, while Zerodha charges 0.06 per cent or ₹6 for every ₹10,000 invested as brokerage. Transacting through the NSE’s goBID is currently free of charge.

Note that these platforms are for buying G-Secs in the primary market. For selling them, you will have to go through your broker.

Returns

What one needs to note is that T-bills do not carry an interest component. They are issued at a discount to their true (PAR) value and redeemed at their true value. Hence, your return on investment is the difference between the two. According to data provided by Zerodha, currently, the effective yield or return on 91-day to 364-day T-bills works out to about 6.7-7.2 per cent.

In case of longer-dated G-Secs, you are paid interest semi-annually.Buying G-Secs makes most sense for conservative investors looking for assured fixed income for tenures over 10 years.

To give an idea of the returns, the current yield on 7.4 per cent bond maturing 2035, is about 8 per cent. This is higher than annuity products offering 5-6 per cent returns.

However, don’t forget the tax aspect. The interest earned from these instruments is taxable as per slab rate; if the holding period exceeds a year, long-term capital gains tax on sale is applicable at the rate of 10 per cent without indexation.

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