G-secs a better alternative to bank fixed deposits

Retail investors can now participate in auctions held by the RBI via exchanges. But remember, they are very volatile

For retail investors, buying government securities (G-secs) is now as easy as investing in a stock. The National Stock Exchange has launched an e-Gsec platform, which allows investors to buy G-secs online and hold them in existing demat accounts. The BSE, too, will soon make this facility available.

Investors can use the platforms to participate in the Reserve Bank of India’s (RBI’s) auctions. “The banking regulator reserves 5 per cent of the notified amount for non-competitive bidding. The securities are offered at a fixed price to small investors based on the weighted average cost of the particular security in the auction,” says Venu Madhav, chief operating officer at Zerodha. You can start with as little as ~10,000 to buy one government bond.

The RBI’s move to allow small investors in the auctions can help a fixed deposit (FD) investor to earn slightly higher returns than FDs. While the State Bank of India offers a 10- year FD at 6.75 per cent, the 10-year G-sec is trading in the range of 7.7-7.8 per cent. The eGsec platform provides not only long-tenured bonds but also treasury bills (T-Bills) that have a maturity of 91 days, 182 days and 364 days.

Until now, if an investor wanted to invest in G-secs, the easiest option available was gilt funds. The funds are, however, highly volatile. When interest rates are falling, they offer double-digit returns, and the return turns negative when interest rate rise. “Investors need to time the entry and exit in these funds and that has to be done with professional help. Gilt funds are, therefore, not for all investors though they can give returns comparable with other longterm debt products,” says Arvind Rao, founder, Arvind Rao & Associates.

While a retail investor can buy G-secs at an auction, there is no secondary market for them to sell the small lots at present. The exchanges are working to list the securities for trading. When an investor buys a G-sec through the exchanges, they need to invest with a view of holding them until maturity. “An investor cannot use this facility to gain from the interest rate movement. If the interest rate falls in the future and the yields on G-secs rise, the investor may not be able to sell and monetise their holdings. Even if the securities are listed in the future, there needs to be enough buyers for the seller to get the right price,” says Rao.

Direct investment in G-secs makes sense for those looking to invest in debt as part of the asset allocation for the long term. “Investors should look at the direct investment in G-secs as an alternative to FDs for now until the secondary market develops and offers trading opportunities,” says Malhar Majumder, partner, Positive Vibes Consulting and Advisory. Another option for investors is the Government of India’s (GoI’s) savings bond that offers 7.75 per cent returns. These bonds are, however, available only for a seven-year tenure. G-secs and T-Bills provide different tenures ranging from few months to more than a decade. But there’s an additional cost to investing in G-secs and T-Bills. You need to shell out annual maintenance charges for the demat account which can range from ~250 to ~750, whereas there’s no requirement for investors to have a demat account for GoI savings bonds.