How many times have we wished to invest in fixed-income instruments sans any risk of default? The money kept aside in fixed deposits earns very low-interest rates, thus, prompting many people to invest in Government securities (G-secs). As opposed to the sale and purchase of G-secs being limited to huge financial institutions, the National Stock Exchange (NSE) collaborated with the Reserve Bank of India (RBI) to allow retail investors to start putting their money in G-secs, especially, the long-tenured bonds and the treasury bills (T-bills). Investors can park their money in G-secs via brokerage firms including ICICI Securities, HDFC Securities, Zerodha and NSE’s goBID.
However, the Retail Direct Scheme (RDS) of the RBI could not entice many retail customers toward buying these government-backed securities. This is in stark contrast to the expectations of the government that had anticipated customer interest by opening up both scope and avenues of direct investing in these instruments. However, recent statistics reveal how a surge in yields on G-secs has pushed customers to consider these instruments over and above bank deposits that are so commonplace.
Are G-secs risk-free?
Since these financial instruments are backed and issued by the Government, there is no scope of these being prone to credit risk. However, the interest-rate risk remains just like other tradeable bonds. This means that whenever the Government announces or is expected to declare a rise in interest rates on deposits, the prices of G-secs can fall, thus, resulting in a capital loss. This can be a bone of contention among many investors not willing to digest the interest volatility. This sudden and unexpected volatility in G-secs can be one reason for many investors holding them only for a short period.
However, this short-term view also means that investors will book losses only on redeeming these securities. Continuing to hold them over a prolonged period ranging between five years and 10 years irons out the notional losses owing to the interest rate risk.
While discussing the preferred investment tenure on these bonds, Vidya Bala, founding partner, Prime Investor says, “Given the recent sharp surge in yields, investors should take advantage of the high rates and lock into government securities and select state development loans (SDLs) with a 5-10-year time frame. Given that interim volatility could be high, investors should buy and hold these products till maturity.”
Inexpensive nature
Investors love to invest in instruments available at nominal charges. Just like fixed and recurring deposits issued by both public and private sector banks at no extra cost, risk-averse investors are buying these securities on the NSE’s or RBI’s retail direct platform, thus, costing the investors nil in terms of brokerage charges or expense ratios.
Bank deposit rates have gone up marginally compared to bond yields that have risen more. This surge in yields has now encouraged more investors to put their money in them for a decade or so, thus, availing them of better returns than other fixed-income instruments sold by banks and non-banking finance companies.
