Recently, the government has permitted the retail participation in government securities mainly the long-dated bonds and the treasury bills (T-bills). Currently, the retail participation in government bonds is more on indirect basis. Retail investors allocate money to debt funds or liquid funds and these debt funds in turn invest in government securities while the liquid funds invest in short term instruments like treasury bills, call money, Commercial Paper, CD etc. Government Securities were available only to banks and large financial institution, but now we can invest in them and take advantage of attractive and guaranteed returns. However, since these are new financial instruments (at least to the retail participants), understanding the nuances before investing is important. For this reason, we have put the following FAQs with a hope that you will be able to figure out the basics.Do read on and post your comments below.
Why is government debt attractive to retail investors as an asset class?
5 reasons why investors will find government securities attractive
- There is no credit risk (risk of default) in government debt. They are called gilt-edged because the payment of interest and the repayment of principal are guaranteed by the government of India. That is a virtual stamp of approval for these investors.
- Returns are assured as the government securities will pay out interest on a half-yearly basis while the Treasury bills are issued at a discount and redeemed at par, with the difference accounting for the yield.
- Most of these government securities are extremely liquid and will be a better choice for retail investors compared to investing in FDs and private debt
- For retail investors there is the advantage of no tax deduction at source (TDS). Thus retail investors do not have to go through the hassles of claiming refund etc. That makes it administratively simpler.
- Above all, these government securities can be used by retail investors as collateral against loan and the haircut is very low in this case. They can also be held in your demat account giving you a more consolidated view of your portfolio.
What is this non-competitive bidding for retail all about?
Under the non-competitive bidding for government securities, retail investors can put in bids for the government securities via their usual broking account only. The modus operandi will be as follows for investment:
- The order will have to be placed with a registered Trading Member (SEBI registered broker) who will in turn place the order in the non-competitive segment for investing in government securities.
- The retail bids in the non-competitive bidding segment will be Rs.10,000 and then it has to bid in multiples of Rs.10,000. The maximum investment permitted in case of one individual is Rs.2 crore.
- The non-competitive bidding makes retail investors eligible to participate in government securities as well as in treasury bills. They will be restricted to just 1 bid per each government auction. As we know, the government is borrowing a much lower figure of Rs.2,88,000 crore in the first half of the fiscal year ending in September 2018.
- The trade will be routed through the National Securities Clearing Corporation (NSCCL), which will ensure that the requisite government bonds are then credited to the demat account of the investors. Therefore, an active demat account is a pre-requisite for bidding in this segment.
- Investors have a wide choice of maturities to choose from. It begins with 91-day treasury bills at the short end of the curve and extends all the way up to 30-40 year securities at the long end of the curve.
Making the retail ownership of G-Secs more widespread
One of the key ideas of permitting retail investors to participate directly in government debt via the non-competitive bidding process is to widen the ownership and increase retail participation. The long term G-Sec ownership and the short term T-Bill ownership is skewed in favor of institutions. Take the case of G-Secs. Commercial banks, insurance companies, FPIs and provident funds jointly account for 75% of all ownership. In case of treasury bills commercial banks again have cornered 50% of the total T-Bills outstanding in the market. This move will ensure that the spread is widened and the ownership is more diversified. In the process, the retail investors also get access to a high quality asset class.
Process flow for non-competitive bidding at NSE
- Once the retail investor places the order with the Trading Member / Participant it will be logged-in into the e-GSec section in the eIPO platform.
- Participants can enter bid from bid entry panel and/or from bulk upload facility
- For each PAN number, only one bid can be made per auction. Once the bid is submitted, system will generate a unique application number, order number and amount to be provided. Broker will insist in funding your trading account in advance.
- Participants can cancel and put fresh bid case of modifications required. Existing orders cannot be modified per se. They can only be cancelled and replaced with a fresh order.
- Exchange will validate bids at EOD with the respective depositories and the NSCCL will provide consolidated funds pay-in report on bidding closure day.
- Allocation of non-competitive bids can be 5% of total issue size at the maximum. Any un-allocated portion can be allocated back to other categories.
- The minimum bidding will be Rs.10,000 (face value) and in multiples of Rs.10,000, but restricted to just 1 bid per PAN per auction with maximum limit of Rs.2 crore for G-Secs.
In a nutshell, the non-competitive bidding process gives a good opportunity for retail investors to diversify their portfolio and also to add a new asset class into their overall portfolio mix.
FAQs on G-Sec
What am I investing in?
You are investing in Bonds/T-bills issued by the Government of India. Since these are backed by the Government of India, these are virtually risk-free investments. The guarantee from the Government is also called ‘Sovereign Guarantee’.
What are bonds/T-bills?? Tell me more.
Whenever you and I need money we go to the bank to avail a loan. Against this loan, we promise to pay the bank periodic interest and also return the money after a certain amount of time. This is common practice, where the interest and principal is repaid back to the bank.Likewise, the Government of India also needs money to build roads, bridges, dams, hospitals, etc. When they run short of money, they approach their bank for a loan, which is the RBI. The RBI, in turn, auctions the loan in the form of bonds/T-bills that you can purchase. Essentially, you are lending a part of the overall loan the government is seeking. Against this loan, the Government of India, promises to pay a periodic interest and also repay the principal at the end of the tenure.The loan which the government intends to repay within a year is called the Treasury Bills or T-bills. Loans which the Government intends to repay over many years are called the Bonds.
What should I choose? T-Bills or Bonds?
Both are great investments if you seek the safety of your capital and investment in these securities depend on your time horizon and cash flows. There are three T-bills variants and they vary based on the maturity period. They are 91 days, 182 days, and 364 days. T-bills do not carry an interest component, in fact, this is one of the biggest difference between T-bills and Bonds. T-bills are issued at a discount to their true (PAR) value and upon expiry, its redeemed at its true value.
An example !
Consider a 91-day T-bill. Assume the true value (also called the Par value), is Rs.100. This T-bill is issued to you at a discount to its par value, Say Rs.98. After 91 days, you will get back Rs.100 and therefore you make a return of Rs.4. So if you have made Rs. 2 over 91 days on an investment of Rs.98, then at this rate, how much would you have made on a yearly basis?
The formula is...
Yield = [Discount Value]/[Bond Price] * [365/number of days to maturity] = [2/98]*[365/91] =8%
So in other words, the T-bill offers a return on investment of 8%, but since you held it for 91 days, you will enjoy this return on a pro rata basis. Typically 91-day yields are around 6%-7.5%. Needless to say, higher the yield, the better it is.
What happens upon maturity of a T-bill?
Upon the maturity, the Government debits the T-bill from your DEMAT automatically, this is called ‘Extinguishment of Securities’ and the par value gets paid to the bank account linked to your DEMAT account.
How the bonds work ?
Bonds differ from T-bills on 2 counts. Bonds have long-dated maturities and they pay interest twice a year.
Every bond issued will have a unique name or symbol. The symbol contains all the information you’d need. For example here is a symbol – 750GS2034A, and this is what it means:
Annualized interest – 7.50%
Type – Government Securities (GS)
Maturity – 2034
Issue – ‘A’ means its a fresh issue
This issue is expiring in 2034. If you were to invest in this bond, you will receive 7.5% interest every year until its maturity in 2034. Please note, the interest will be paid semi-annually, so you will get 3.75% interest twice a year. Finally, upon maturity, you will also get back your principal amount.
Here are few more government security (GS) symbols –
|Symbol||Annualized Interest||Semi-annual interest||Maturity Year||# years to Mature|
Every bond has a Par value, of say Rs.100. When you invest in a bond, you usually invest either at a discount (ex: 98, 97 etc) or at par (100), or at a premium to par (101,102 etc). The price at which you invest in a bond depends on something called as an ‘auction process’..
Now, consider you invest in 750GS2034 (7.50% with a maturity of 2034 or 16 years from now) at a discount price of 98.8. Assume, you invested in 200 of these bonds, so you’d pay 200*98.80 = Rs. 19,760
From the time you invest, the interest cycle starts. The interest is paid on the face value of the bond. The total amount you earn is as follows –
|Time Period||Interest||Cash flow||Remarks|
|0 – 6 Months||3.75%||3.75% * 100 * 200 = Rs.750||Half year interest|
|6 months – 1 year||3.75%||3.75% * 100 * 200 = Rs.750||Half year interest|
|Finally, at Maturity 2034||Principal repayment at Par||200 * 100 = 20,000||Principal repayment|
So on an investment of Rs. 20,000 you will earn a yearly interest of Rs. 1,500 which works out to a simple interest of 7.5% annual interest. If you do the math, the yield on this works out higher due to compounding and interest on interest. The interest payment gets credited directly to your bank account linked to your DEMAT account, just like the way you receive the dividends from a company.
You say that investments in GSec is better than investments in FD, why is that?
There are a couple of reasons for this, but the big one first – the yield on G-Sec is better than the yield on FD. Here is a quick comparison of the yield (in percentage) for both FD and GSec –
|91 days||182 days||364 days||1 Year||2 Years||3 Years||5 Years||10 Years|
*Source: SBI FD rates effective from 1st July 2018. GSEC yield as on October 5, 2018
Apart from better yields, there are few other factors which make G-Sec more attractive –
- Unlike bank FDs, the investments in G-Sec are safe as its backed by Government of India
- Guaranteed return on both interest and principle
- Unlike FD, there is no TDS
- Long dates maturities which mean you can lock in attractive interest rates for a longer period
- Can use used as a collateral to avail loan
- Option to sell them in the secondary market
Clearly, whichever way you look at it, G-Sec is a smarter option than bank FDs.
How do you sell GSEC in secondary market?
This works exactly like how you buy and sell stocks.
Let’s say you decide to invest in 750GS2034A. This means you will continue to enjoy a semi-annual interest payment of 3.75% every 6 months until year 2034. Now, after a few years, you no longer wish to hold this bond. In such an event, you can decide to sell this bond in the secondary market, pretty much like how you buy and sell stocks on NSE.
Is there any Terms and Conditions for applying for GSEC?
Yes the regulator has specified certain terms and conditions which you need to read and acknowledge before you apply for GSEC. The same is attached with this article for your reference.
What else do I need to know?
Think of the whole thing as applying for an IPO followed by the stock getting listed on the exchanges. It’s pretty much the same. The auction process is like the IPO and once the bidding is done, the Bond (or T-bill) will get listed on the exchange.
The minimum ticket size if Rs.10,000/- and its multiples and a maximum of Rs. 2 Cr. You can place the orders when there are new auctions (just like an IPO). However, the good part is that RBI notifies the auction dates and schedule well in advance.
What about taxes?
Bonds – Interest income is credited to your bank account. It is considered as income from other sources and taxes have to be paid as per the income tax slab. If there is any appreciation in the bond price, it is considered capital gains. Long-term (LTCG) is 10% flat or 20% with indexation. STCG is as per the applicable slab rate.
T-bills – You buy at discount and sell it at par. This appreciation is considered as short-term capital gain, and taxes as is per the applicable slab rate.
Will I get assured allotment if I place my order?
These securities are issued for limited amounts and there is no guarantee of allotment if the number of bids received is higher than the issue size. However, if you fail to get an allotment, you can try again next week. RBI carries out multiple issues a month.
This sounds good?