What Is A No-Risk Investment?

There are times when you want an investment that is totally, completely safe. Fill it, shut it, and forget it types. No thinking, no worries & no maintenance. An investment in government security is a no-risk investment.

There is no credit risk, meaning that there is no risk of the entity/person you are lending to not paying you back.

Bank deposits are considered safe, but as well know the insurance is only for Rs.5lacs. If the bank where you have placed a deposit goes bankrupt, you don’t have much recourse. Insurance is only up to 5 lacs, which is all balances (FDs, Savings) altogether.

Even so, Bank fixed deposits are not available for very long tenors like 10, 25, 30, or 40 years. Government securities can fill that need. These were not available for retail investors like you and me but now these are available for investment for as low as an investment of Rs.10, 000.

What is a Government Security or a Gsec?

Most governments worldwide borrow to fund the gap between their revenue and their income. We need not go into the whys and the merits of doing so. The public will keep lending to them as long as the government is solvent and not profligate.

The government will keep paying the interest and principal of the securities which mature. And borrow more from the public as per their needs.

The Central Bank (in our case the Reserve Bank of India) manages the execution of the borrowings of the government.

The government has been borrowing and repaying for ages but the eligible investors were only large Institutional buyers. The minimum trade value was about Rs.5 crores. The government via the Reserve bank of India made it available to the retail public at the end of 2021.

Retail investors can buy Gsecs directly from The RBI Retail Direct Platform  .

What can you invest via The Retail Platform?

• Gsec-dated securities range from 1 year to 40 years. The interest is paid twice a year (Semi annually).To know what is the interest rates or yield of the Gsecs are issued and traded you can check here.
• Retail can also buy  Government of India Treasury Bills (T-bills): T-bills are issued when the Central government wishes to borrow for less than one-year tenure and are issued in 91-day, 182-day, and 364-day tenors.
• State governments also borrow separately & their borrowings are called SDLs or State Development loans. This is for savvy investors as the finances of every state are different, so the investor has to be aware of that.
• Sovereign Gold Bonds.

For the purpose of this post let’s talk about Central G-secs dated securities.

When a government decided to borrow from the market, investors are large banks institutions, pension & insurance funds. They issue a borrowing calendar and publish it in the newspapers and on the Reserve Bank of India website.

When they actually decide to borrow, it’s called an auction. The participants bid to invest in government security. The interest rate is decided by the bidding and the government decides to either accept the bid or reject it if the rates are low as per their judgment.

The rate at which the government decides to accept the bid is called the cutoff.

Retail investors can participate in the primary bidding, they are not allowed to bid but will be allotted at the cutoff rate given to the institutions.

All this sounds a bit complicated but it gets easy when you get familiar with the terms.

What are the Pros & Cons of investing in Government Security?

Pros

1. Very safe. If there is a default (improbable but not impossible) in the government security of a country, then pretty much the whole financial system of that country is in shambles.
2. Investment for long tenors up to 40 years is possible.
3. Cash flow can be managed as interest is paid half yearly. As the coupon (interest) rate is fixed for the full tenor of the security there is a predictable cash flow.
4. No TDS on interest paid out. 

Cons

1. Interest is taxable. Net yield can be low.
2. The secondary market for Retail Gsecs is not very well developed yet so selling it may be a bit cumbersome. You have to go to the window of NDSOM to sell securities.
3. Unlike fixed deposits the principal value of bonds if sold before the maturity can change depending on the movement in bond markets. For this, you need to understand the link between the yield & price of a bond. You can read about it here & here.
4. The holdings do not reflect in your Demat a/c. They sit in a special SGL a/c of the RBI.

There are many government-backed schemes like the PPF, Kisan Vikas Patra, National Savings Certificate, and RBI floating rate bonds. There is a case to be made to invest in Government security when you want a long-term annuity where your principal is very safe. The return may not be tax efficient but is predictable.

If you understand interest rate cycles and invest when the cycle is higher it can be an advantage. My personal opinion is that any time a benchmark 10-year Gsec trading is above 7.5%, it’s a good time to lock in for longer tenors. Keeping in mind the economic and geopolitical backdrop of the country.

Investing in direct bond markets is not very popular for retail and it takes a little time to understand the nuances of it. It is a worthwhile exercise nonetheless.

Retail investment in government securities is an interesting albeit low-yield option. The investment is not totally illiquid but it will require some effort and understanding to sell the security before maturity.  Right now a 10 -25 year gsec trades at a yield of 7.30 – 7.42%.

Write a comment below, if you wish us to write a follow-up post on the technicalities and actual nuances of investing in the RBI Retail Direct platform.