RBI had in November obtained 32,000 registrations from retail buyers inside a week of the launch of the RBI Retail Direct (RD) scheme. Compared to this, there are greater than 12.60 crore mutual fund accounts or folios registered with asset administration corporations.
The variety of RDG accounts, albeit small, hints at a robust curiosity amongst retail buyers for authorities bonds, which has historically been dominated by institutional buyers.
How the scheme works
Opening an RDG account, which is freed from value, permits people to purchase authorities securities straight within the major market (auctions) in addition to purchase or promote within the secondary market.
“These securities from the central and state governments are likely to have excessive costs typically working into lakhs of rupees, however the platform offers retail buyers quick access at comparatively decrease prices. G-secs and SDLs have the best credit score rankings,” said Adhil Shetty, chief executive officer, BankBazaar, an online marketplace for financial products. An investor can buy securities for as little as ₹10,000 and up to a maximum ₹2 crore.
There are two methods to purchase securities by way of the retail direct platform. The first is by putting a bid within the major auctions. The bids are non-competitive solely, that means buyers can solely enter the variety of securities and never the worth. The second approach is by putting a purchase quote within the secondary market part. Investors also can promote securities by putting a proposal (promote) order within the secondary market part.
Taxation of presidency bonds
Tax on revenue from authorities bonds is levied in two methods. The first is on capital positive aspects from the promoting of bonds earlier than the maturity date and the second is on the curiosity earned. On positive aspects arising out of promoting listed authorities securities earlier than maturity, short-term capital positive aspects (STCG) tax is utilized until one year and long-term capital positive aspects (LTCG) tax is levied after one year.
STCG is taxed as per the person’s revenue tax slab rate, whereas LTCG on authorities bonds are taxed on the rate of 10% (with out indexation profit) and curiosity revenue from bonds is taxable as per the investor’s slab.
Pros and cons
Experts opine the RBI RD bond scheme is a good initiative as it will possibly present a retail investor an option to get publicity to authorities bonds.
The yield immediately on the benchmark 10-year authorities bond is round 6.80%. Compared with this, government-run small financial savings schemes at present provide curiosity within the vary of 4-7.6%. However, there’s a catch. “With small financial savings, there’s normally lock-ins of upwards of three years, which isn’t the case with tradable securities resembling bonds,” mentioned Shetty.
A key concern, nonetheless, with authorities securities is liquidity within the secondary market. “The benchmark safety immediately is extensively traded. But tomorrow, after one year, when it ceases to be the benchmark, the commerce might scale back to zero. It wouldn’t be potential for an investor to exit the position,” mentioned Madan Sabnavis, chief economist at Bank of Baroda.
As per Sabnavis, there are round 92-100 securities, that are listed when it comes to all of the borrowings of the federal government, out of which solely 4 or 5 have lively buying and selling, and one other 15 or so are traded on and off.
Financial advisors additionally counsel retail buyers to steer clear of the RBI RD bond scheme. “While the scheme can enhance participation in authorities securities, it’s not as easy and seamless as equities,” mentioned Harshad Chetanwala, a Sebi-registered funding adviser (RIA) and co-founder of MyWealthGrowth.
Investors ought to take into account that whereas investing in G-secs doesn’t carry credit score threat, there’s at all times a excessive curiosity rate threat as these are long-term debt devices. “For instance, when you maintain a long-term bond with an curiosity rate of seven% and if the curiosity rate goes as much as 8%, the worth of your bond will scale back. The longer the period of the bond, the upper is the impression on the bond value,” he mentioned.
What ought to buyers do?
Experts say that small buyers can be higher off with debt funds, as they’re managed by skilled fund managers. Further, on a three-year foundation, gilt mutual funds that predominantly spend money on authorities securities have delivered a median return of seven.31%, which is greater than the benchmark authorities bond.
the App to get 14 days of limitless entry to Mint Premium completely free!