RBI is enabling direct access to retail investors in Gsec market. Gsecs are bonds issued by the Government of India and are the safest investments in terms of capital protection, if held to maturity.
The government in the budget for FY2021-22, stated that RBI will enable access for retail investors into the Gsec market. The details will be out soon, and if retail investors are allowed to trade and invest in Gsecs, like institutions, the market depth will widen, Gsec market is fully electronic like equity markets and it is easy to trade and settle gsecs unlike corporate bonds.
Corporate bond market is almost fully over the counter and trading and settlement of corporate bonds are cumbersome for investors, both retail and institutional. Despite the corporate bond market inefficiencies, retail investors still invest in corporate bonds to get higher returns and more options than what is available in fixed deposits.
Gsecs offer wide maturity options and are very liquid
The government of India issues Gsecs from maturity of 1 year to 50 years. This helps investors to match cash flows with financial objective. For example, 30 years down the line you require retirement funds, gsecs with 30 years maturity are better than insurance policies as they do not have any expenses, offer ease of transaction and also liquidity if required. You can also be opportunistic on gsecs and trade in them for capital gains, which can be substantial if interest rates fall.
Gsecs can replace many illiquid and opaque investment products that are offered for investors as long term savings. However, unlike post office and ppt investments, gsecs do not offer any tax benefits, except for long term capital gains tax.
Timing is important to invest in Gsecs
Like in equities, gsec prices can be very volatile and if prices are high, chances are that they may fall if interest rates rise from lows. Gsec prices rise when interest rates fall and fall when interest rates rise, Hence, investing in gsecs when interest rates are low may not be optimum, as inflation can negate any returns that the investment provides. On the other hand, when interest rates are high, returns are high and there are chances of capital gains when interest rates fall, as inflation tends to fall when interest rates are high.
At this point of time interest rates are low and can rise in the near future.
