Joydeep Sen
For investment decisions, the guiding principle should be the SLR of investments: safety, liquidity and return. In terms of safety, government securities (G-Secs) are the safest since they are issued and backed by the government. It should be noted that there is an element of market risk to them i.e. the price of the bond falling after you purchase it.
However, you can eliminate the risk completely by simply holding the bond till it matures. If you do, you’ll get the face value of the bond i.e. the price at which it was issued. If you sell before maturity, you will get the prevalent market price for it, which may be or less that what you paid for it.
In terms of return, the market environment is currently favourable. Something remarkable is happening now — yield i.e. annualized return of G-Secs are higher than bank fixed deposit rates. Bank fixed deposits are generally safe, but government bonds are the safest, which is why returns on G-Secs are generally lower than those on bank fixed deposits. To put things into perspective, the yield of the most-tracked 10-year G-Sec, in September 2018, had moved up to 8.2 percent. Though bank deposits have tenures of less than 10 years, this gives a ballpark comparison between the two. The 10-year yield is currently at 7.45 percent.
The issue in G-Secs is about liquidity. The secondary market for G-Secs is wholesale i.e. large institutions deal in big trading lots, out of reach for the retail investor. As discussed earlier, the way out of this liquidity issue or the possibility of price in the market coming down, is to hold it till maturity. If you are sure that you can hold it till maturity, there is a strong case for investment. The horizon need not be long, there are Treasury Bills (T-Bills) issued by the government, of maturity less than one year. Government bonds per se are of various maturities, all the way from one year to almost forty years.
How to do it
Liquidity being the issue for retail investors, this investment avenue has mostly been out of reach for the common man. Initiatives have been taken by the government; in the primary issuances of G-Secs, where prospective buyers have to bid i.e. put an application to buy a certain quantum at a certain price on a competitive basis, there is a non-competitive bidding section for retail investors. In spite of non-competitive being available in G-Secs and T-Bills, it has not taken off, primarily due to lack of awareness. Execution also is an issue for the common man.
Now, more avenues are opening up. NSE has launched a mobile app and web platform for retail investors to buy G-Secs, called NSE goBID. This allows retail investors to make payment directly from their bank accounts using the Unified Payments Interface (UPI) and internet banking. Through this App, retail investors can invest in T-Bills of 91 days, 182 days and 364 days and various Government Bonds from one year to almost 40 years. Investment can be done almost every week after a one-time registration. BSE has launched BSE-Direct, which is a web-based platform for participation in the non-competitive bidding of G-sec auctions.
This facility is also offered by internet-based and mobile app-based private sector service provider Zerodha. Execution on these platforms is relatively easy and simple.
Earlier there was an operational issue for retail investors in G-Secs, which is opening a CSGL A/c (constituent subsidiary general ledger account) with a Bank. Now, for investing through NSE goBid or BSE Direct, or Zerodha, the usual demat account will suffice.
Despite all the efforts to execute the trade while buying, the only issue is secondary market liquidity. If there are not many buyers or sellers in the secondary market, if and when you want to sell, there is an issue. Hopefully, with spread of investor base, with more people holding G-Secs, the requirement of trading and hence liquidity will start developing.