Mumbai: The Reserve Bank of India (RBI) has garnered nearly 32,000 registrations from retail investors to buy government bonds in just six days, reflecting investor eagerness for the asset class that was hitherto an institutional monopoly.
While the investment may be safe, portfolio advisors are cautioning that investors should be aware of potential mark-to-market losses because of the interest rate risk in an upward cycle that could begin as early as the first quarter of next year. Bond prices and interest rates move in opposite direction.
“The number of accounts being opened is encouraging, given that government securities are safe, but with returns on the lower side and do not have the pull of a crypto giving sky-high returns,” said Joydeep Sen, fixed income consultant at Phillip Capital.
“The only aspect to watch out for is liquidity when you intend to sell your holding through your RDG account, of which we will get a better sense going forward,” he said.
Individuals can open a retail direct gilt account with the RBI using an online portal.
Prime Minister Narendra Modi launched the programme last Friday.
In a rising interest rate scenario, investors are likely to incur mark-to-market losses if they sell it before scheduled maturity. The interest rate cycle is set to change amid rising consumer prices.
In the current circumstances if sovereign securities are held until maturities it aids steady flow of interest income. Sovereign papers offer highest safety of investment allaying rate uncertainties.
Retail participation in bonds globally has not yet matched the interest for equities. Of late, it is showing some signs of improvement. Countries like Japan have funded their development using domestic retail bond markets.
Back home, fixed income products like Small Savings Schemes or debt mutual funds are said to be offering better returns with similar tax structure.
Sukanya Samriddhi Yojana accounts earn 7.6%. Debt GILT fund offers an average 8.77% yearly over 10 years, show data from Valueresearch Online. Benchmark bonds now yield 6.36%.
A tax rebate can burnish the allure of the scheme, say wealth advisors.
If an investor sells bonds from demat account after holding them for more than a year, s/he will have to pay a 10% capital gain tax on investment appreciation. Moreover, the annual coupon rate is taxed as per income tax slabs. Collectively, that eats into investment returns.
“Retail Direct needs awareness among senior citizens who can benefit from it,” said Virkam Dalal, CEO at Synergee Capital.
“GOI bonds can be an alternative to LIC annuity plans as retail investors can invest in the longest maturity until 2061.”
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