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Tata Capital > Blog > Wealth Services > Should you invest in GSec directly through RBI?

Wealth Services

Should you invest in GSec directly through RBI?

Should you invest in GSec directly through RBI?

Government securities are regarded as one of the risk-free safest investment options. However, investing in them was a bit tricky until the Indian government launched an investment platform known as RBI Retail Direct Gilt Account.Withthis platform, it becomes easier for retail investors to buy and sell government securities. If you are a risk-averse investor always looking for safe investment options, then this is an addition to the list of your available choices like debt funds, small saving schemes, and others.

How Retail Direct Gilt account can be used?

You can use this account to buy and sell government securities in the secondary market. However, that is not all, with this account, you can even take part in auctions to directly buy GSec from the primary market as well. GSec can be a great long-term investment option for retail investors who are looking for risk-free or low-risk investments.

Government bonds are yielding fair returns and here is a snapshot for the same -

Government Bond India 10 years6.37
Government Bond India 30 years6.96
Government Bond India 5 years5.71
Government Bond India 3 years5.12

The primary reason for the popularity and demand of this bond is the safety or the guarantee that is provided by the government to provide a risk-free return to the investors. Earlier, investing in these securities was not available directly and thus people used to invest in them via Gilt mutual funds or insurance plans. Now with RBI Retail Direct, you can invest in government bonds directly.

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Why you should invest in GSec via RBI Retail Direct?

There are different reasons for choosing to invest in GSec for retail investors via this channel. Some of the important reasons are –

  • Primarily, Government securities are risk-free investment vehicles. There is no credit risk associated with these instruments.
  • Secondly, GSec is providing decent returns for a longer duration. As you can see in the table given above, the 30-year government bond is yielding a 6.96% return on an annual basis. Similarly, the 10 years Government bond is also providing a decent return of 6.37%. However, the GSec with a shorter duration is providing lower returns. So, if you are looking for long-term investment in risk-free instruments, these government securities for 10 years, you can consider these instruments.
  • These securities can also offer capital appreciation as the bond price and interest rate in the market are inversely related. If the interest rate drops in the market, then the bond price will increase resulting in capital gains for the investor. However, if the interest rate surges, then the price of the bond will fall which can be a thing to worry about for the investors.
  • As these are government securities, traded in the secondary market, these are fairly liquid. These can be traded on NDS-OM.
  • If you are wondering what benefit is there to invest in GSec via the RBI Retail Direct channel, then you must know that there are no fees or commission, or any kind of charges that you had to pay to the intermediaries earlier. You can directly buy and sell without any brokerage or commission. Investors only have to bear the payment gateway fees. Finally, with GSec, you can diversify your portfolio as these instruments can bring down the overall risk factor of the portfolio.

Is there any risk or concern regarding this investment channel?

Government securities don’t carry credit risk, however, when you are trading them in the secondary market, they carry interest risk. In simple terms, the price of the security/bond fluctuates as per the interest rate in the economy. When you are buying and selling the bond in the secondary market, if the interest rate increases, you will see the price of the bond decreasing. However, if you hold the GSec in your account till maturity, there is no interest risk factor.

However, the purchase process might be a bit complicated for new retail investors. To begin with, investors need to keep track of dates to purchase specific securities. Being a small retail investor, one may not have a competitive advantage in the bidding purchase price and an investor may have to buy the security at the average bid price and not the purchase amount the investor enters in the bid.

From a tax perspective, if an investor sells bonds from a demat account after holding them for more than a year, then capital gain is taxed at 10%, also, the annual coupon rate is taxed at the marginal rate, which, eats into investment returns. Alternatively, debt mutual funds offer indexation benefits if held for more than 3 years.

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With this new direct channel for investing in government securities, retail investors will get a major benefit. They can now invest for the long-term in these risk-free government bonds without paying any commission or charges to the intermediaries. If you are looking for assistance in investing, please contact us at Tata Capital Wealth for professional guidance.

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