A new investment avenue is available to retail investors with India’s central bank, allowing them to invest in government bonds for the first time.
The Reserve Bank of India has opened up the government bond market to retail investors by allowing them direct online access to the government bond market.
India is the first Asian country to allow direct participation of individuals in the government securities market.
Only a few countries, including the United States and Brazil, allow retail investors direct access to government bonds, both primary and secondary.
“Retail investors can now buy and sell government bonds, also known as gilts, directly online. With this, more investment instruments are open to retail investors; besides fixed bank deposits, fixed income mutual funds and small government savings plans such as public provident funds, ”said Binoo Nayyar, CFO of TrendRiser Securities, Dubai.
Access to the primary and secondary markets is allowed directly through the central bank, which has allowed retail investors to open gold or G-sec accounts on a platform called Retail Direct.
Explaining the procedure for opening a bond account, Nayyar said, “Investors can open a golden account on the central bank’s electronic platform E-kuber. Retail investors can place a direct offer with NDS-OM, an anonymous electronic order matching system for trading in the secondary government securities market. “
Interest rates on government securities are higher than fixed bank deposits (FD) in some tenors.
Currently, FD rates hover around 5-5.5% per year.
Besides the higher interest rates, government bonds offer a sovereign guarantee, which means that they are safe investments with the Indian government guaranteeing full repayment at maturity.
Bank deposits and term deposits with banks do not provide a sovereign guarantee. They are only insured up to 500,000 INR (£ 4,908, $ 6,891, € 5,677) with the Deposit Insurance and Credit Guarantee Company.
The move is part of the central bank’s efforts to increase individual participation in government securities and to improve ease of access for these investors.
This access will broaden the investor base and provide retail investors with the opportunity to participate in the government securities market.
More than a safe investment for retail investors, this move will also strengthen the bond market in India.
There is a better option
Although NRI investors have shown a great deal of interest in the new investment vehicle, not all advisers favor investments in government gilts.
They advise retail investors to opt for gold mutual funds over direct investments in gilts for a reason: it’s easy to cash in gold mutual fund shares while it’s relatively difficult to cash in. liquidate direct investments in gilts.
Sajith Kumar PK, Managing Director and Managing Director, IBMC Financial Professionals Group, Dubai, said it remains to be seen whether there will be liquidity for retail investors who buy these gilts which offer more interest rates than on fixed deposits.
Still, term deposits are preferred by average NRI investors, perhaps due to their unfamiliarity with the bond market.
Instead, they should go for the gilts that offer sovereign collateral as well as higher interest rates.
“Direct investment in gilts is suitable for investors looking for investments with a high level of security. They should stay invested in gilts until they mature, ”he said.