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How to invest in G-secs and make money
When interest rates fall, investments in bonds will see appreciation in value because price and interest rate are inversely proportionate.
For retail investors, the easiest way to invest in bonds is through mutual funds (MFs). There are both long-term and short-term debt MFs and one can choose according to liquidity requirements.
Government securities (G-Secs) have had a good run over the past month on expectation of a cut in interest rates by the Reserve Bank of India following the easing of inflation. Investors looking to invest in G-Secs directly can do it through Samriddhi, the web portal of IDBI Bank.
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How to invest in G-secs and make money
According to N S Venkatesh, head of treasury at IDBI Bank, the volumes are moderate but are slowly picking up. The minimum amount one can invest is Rs 10,000. The average ticket sizes is around Rs 1 lakh.
"Retail investors should keep a small part of their debt investments in G-Secs as part of diversification. Because when interest rates fall, bond prices will go up and there will be capital appreciation. Besides, there is no TDS (tax deducted at source) in these bonds. Another advantage is that G-Secs can be pledged as security for loans," says Venkatesh.
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How to invest in G-secs and make money
The advantages of investing in G-Secs is that they are secure, offer liquidity and stable returns. If interest rates go down then investors will see appreciation in capital.
There is no TDS for investing in bonds, but the interest income is added to your income and taxed according to your slab.
"Investing in G-Secs is a good option for, say, a self-employed person. You can earn interest income every six months, which you can reinvest in other instruments. Since these are long-term bonds, it also makes sense to invest from a long-term point of view," says Venkatesh.
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How to invest in G-secs and make money
But investing directly in G-Secs is not easy for retail investors. To begin with, the avenues for doing so are limited. Not many banks and primary dealers provide the service, though there is a provision. While liquidity is not an issue pricing can be an issue since the ticket sizes are small.
Investors will have to track the movements in G-Sec yields on a regular basis, which can prove to be cumbersome.
According to Vineet Arora, executive vice-president, ICICI Securities, it is not advisable to invest in G-Secs directly.
Investors who want exposure in G-Secs can consider gilt MFs. These are more volatile than other debt funds but one can invest in these if the view is that interest rates are likely to fall.
"We are recommending a duration of one-two years," says Arora.
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How to invest in G-secs and make money
Venkatesh also agrees that from a tax point of view, gilt MFs might be more efficient. But you will have to pay the asset management fees.
For investors wanting safety, tax-free bonds issued by public sector companies such as the National Highways Authority of India or Rural Electrification Corporation are a good option. Although the supply in the secondary market is limited, individuals looking to invest around Rs 5 lakh would be able to do so.
Investors can also consider G-Sec exchange traded funds, offered by some fund houses, Arora adds.
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How to invest in G-secs and make money
How to invest in G-Secs
If you want to invest in G-Secs directly, you need to open a Constituent Subsidiary General Ledger Account (CSGL) with a bank or a primary dealer. The bank will then buy and sell the G-Secs on your behalf from the market.
While there is no minimum amount stipulated for such an account, most banks wont agree to open one unless you have a minimum of Rs 1 lakh to invest.
Liquidity is not an issue, since there is lot of demand for G-Secs in the secondary market from banks and primary dealers. But pricing can be an issue for retail investors.
"Since the ticket sizes for retail investors are smaller, they have to negotiate with banks. Often the bank will buy the security at 10-15 paise lower than market rates. Similarly, if the investor wants to buy, he might have to shell out 10-15 paise higher than market rates," says a bank official.
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How to invest in G-secs and make money
IDBI Bank has a web-portal called Samriddhi for retail investors to trade in G-Secs. All you need is a bank account and a demat account.
It need not be with IDBI Bank. You can use your existing ones. You have to register on the portal and choose the G-Sec you want to buy or sell. After doing a limited KYC, you can give the buy/sell order.
IDBI Bank does not charge any brokerage fees and the rates for the G-Secs are the wholesale rates available on RBI's NDS-OM platform.
NSE's debt platform, which was launched recently, also has the option for trading in G-Secs, though as of now the focus is on corporate bonds, said a spokesperson.
