With RBI hiking rates, G-secs are offering higher yields than deposits from leading banks.
The usual norm for any investment is: better the credit quality, lower your return, and vice versa. But, what if you were to get the best credit quality at attractive yields (annualized rate of return)? Isn’t that irresistible.
The best credit is sovereign, that is, securities issued by the government. Usually, it means bonds issued by the Central government, or G-secs. It also includes securities issued by state governments, known as state development loans (SDLs), treasury bills (T-Bills) issued by the Central government, as well as sovereign gold bonds (SGBs).
These securities are not rated as government securities do not require a stamp from rating agencies. This is relevant, as some people think of G-secs as AAA bonds. Perception-wise, AAA rated bonds issued by companies are a notch lower in credit quality than sovereign bonds. In the current market context, the yields on G-secs have moved up, as the Reserve Bank of India is increasing interest rates and is expected to hike rates even further.
What are the G-sec yields available currently? (You can refer to this link https://www.ccilindia.com/Research/Statistics/Pages/TenorwiseIndicativeYields.aspx). One-year treasury bills are available at a yield of 6.28%. For the sake of perspective, one-year deposits at State Bank of India offer 5.3% (5.8% for senior citizens). So, you are getting better-quality credit at a higher yield than deposits from a leading bank. G-secs of 4-5 year maturity are offering yields of around 7.18% and those with 9-10 year maturity are offering 7.47%, while yields of 5-year SDLs are at 7.69% and those of 10-year SDLs are at 7.83%. These levels of return are definitely attractive. You may do your own comparison with other avenues—bank term deposits, small savings schemes (post office schemes) or RBI Floating Rate Bonds.
The next question is, how do you execute the investments? The mutual fund route is always there. That apart, you can do this directly. The RBI has launched the retail direct scheme or retail direct gilt (RDG) account. Individuals can open an account and invest / trade in G-secs, SDLs, T-bills and SGBs. The market for G-secs, T-bills and SDLs is wholesale where institutional investors trade in big lot sizes, out of the reach of the public. But RDG, as the name suggests, is meant for retail investors. The RDG system works seamlessly and you may access it without any inhibition as it is run by the RBI. However, there is only one small issue. The platform has as many as 73,713 registrations but retail investors have purchased government bonds worth a measly ₹96 crore in the first six months since its launch.
Hence, if you need to sell your G-secs purchased through RDG prior to maturity, liquidity is not guaranteed. There has to be a buyer for your instrument at that point of time. If your time horizon matches the maturity of the security, there is no issue.
There is another way of doing it. Given the attractive yield levels and increasing interest from investors, certain bond houses are purchasing G-secs from the wholesale market in their own account and selling it to clients in relatively smaller lot sizes. In this case, as a service, if you need to sell the G-secs prior to maturity, the bond dealing house will assist you. However, for the business to be feasible for a bond dealer, the investment lot size has to be large enough. This makes this route suitable for the mass affluent or HNI (high networth individual) segment, and not retail investors.
Another technicality, just for awareness, is that G-secs are usually traded through an account called Constituent Subsidiary General Ledger (CSGL). In the RDG system, the RBI, as a facility, holds the securities on behalf of the retail investors and saves them the rigmarole of opening a CSGL account. If you go through a bond house, as a service, they will undertake the process of transferring the securities from the CSGL so that you can hold these securities through your usual demat account.
There is a possibility of G-sec yield levels going up further, as the RBI rate hike cycle is very much on. Given that the current yield levels are attractive, you may start buying these now and continue doing so in a staggered manner. This is akin to the concept of systematic investment plan, or SIP, in mutual funds. You can purchase G-secs of various maturities in line with your cash flow requirements.