Investing in government securities alongside institutional investors

A Government Security (G-Sec) is a tradeable instrument issued by the Central Government or the State Governments. It acknowledges the Government’s debt obligation. Such securities are short term (usually called treasury bills, with original maturities of less than one year) or long term (usually called Government bonds or dated securities with original maturity of one year or more). In India, the Central Government issues both, treasury bills and bonds or dated securities while the State Governments issue only bonds or dated securities, which are called the State Development Loans (SDLs). G-Secs carry practically no risk of default and, hence, are called risk-free gilt-edged instruments or Gilts.

G-Secs are issued through auctions conducted by RBI on an electronic platform (called E-Kuber) under Competitive bidding (for banks, FIs, institutional investors) and Non-Competitive bidding (for individual investors).

Reserve Bank of India’s (RBI) Retail Direct Gilt scheme was launched in November 2021 to provide one-stop access to facilitate investment in government securities (or G-Secs) by individual investors (Retail and HNIs) allowing them to buy government debt papers directly. This initiative would ensure that, over time, more individual investors, seeking capital protection along with returns higher than that of fixed deposits (FD) and several small savings schemes, would invest directly into government debt. The scheme primarily aims to bring more people into bond markets, widening the government’s borrowing opportunities.

Talking about the operational aspects, an investor can open a Retail Direct Gilt (RDG) account, completely free of any charge via the online portal, and can then directly invest a minimum of Rs.10,000 and maximum of Rs.2 crore per security. The investor can invest in the Primary markets – when a bond is issued by the government for the first time or could also participate in the Secondary market (called NDS-OM) – and whose access was available only to banks and institutional investors, earlier.

The RBI Retail Direct platform allows the investors to invest in four kinds of G-Sec:

1. Treasury Bills or T-Bills that the Government of India uses to borrow for a short period of time typically between 91 and 364 days.

2. Government of India Dated Securities (long-term government bonds wherein the borrowing ranges from 1 year to 40 years)

3. State Development Loans or SDLs (issued by a state government) which have a typical borrowing period of 10 years.

4. Sovereign Gold Bonds (SGBs) which are RBI-issued government securities that are denominated in grams of gold.

G-Secs carry very minimal credit risk and at the same time they offer reasonable yields over a longer duration and can be an attractive option for retirees and savers who prefer a low risk, moderate return investment product. Moreover, since the G-Secs are tradeable in the secondary market, the investors can make capital gains on them by accurately predicting the interest rate cycle. However, it is important to note that the price of these securities do keep fluctuating in the secondary market. As a matter of fact, prices of G-Secs are affected by speculation in the direction of interest rate changes, inflation, market liquidity, RBI announcements, among others. Which means that while an investment into these instruments, with the purpose of making a profit via capital gains, is safe from a credit risk perspective but its price may go up and down depending on some of the external factors. Alternatively, investors could generally hold these government securities until maturity thereby avoiding price volatility.

An alternative route to invest in G-Secs is through Debt Mutual Funds (MFs). There are specific categories of Mutual Fund schemes that primarily invest in government securities of different kinds (except T-Bills and SGBs). Surely, Debt MFs do levy an expense ratio and exit loads (wherever applicable) but can prove to be more tax efficient, in the long run. This is so because you receive an annual or semi-annual interest when you invest in a government bond directly. And that interest is fully taxable at your slab rate every year. However, in case an investor holds debt funds for more than 3 years, the gains will be taxed at 20% with indexation benefit. But if you sell your debt fund holdings before three years, there will be no tax advantage. The gains will be added to the income and taxed as per the slab of the individual. Additionally, liquidity is higher among Debt MFs and come with a greater ease of exiting than G-Secs.