India is opening its $1.1Trillion Bond Market to Retail Buyers – a headline that graced the Bloomberg website a week after Diwali. This initiative garnered plenty of interest as the PM announced the latest reform – RBI’s Retail Direct Scheme (RDS).
The government decided to open up its gold bond, treasury bills, and government securities market to retail buyers through this scheme. This move aims to widen the investor base to finance government borrowing.
The scheme opened on 12th November with 20000+ accounts added till 9 pm on 14th November. The number of accounts indicates people are willing to invest in government bonds.
The bond market has been where large institutions and corporate investors invested their funds, with little retail investment, unlike the equity markets. But this initiative should change this narration. Investors looking for safer investments will find the RDS attractive.
Here’s a look at how the RDS works
Special Platform: The Centre launched a platform; available on retaildirect.org. It offers access to government securities, gold bonds, and treasury bills. As an investor, you must open a Retail Direct Gilt Account to start investing. You can hold the account singly or jointly with another eligible investor.
Eligibility: To invest via RDS, you must have a valid PAN or any other KYC document; and a rupee savings account. In the case of NRIs, the investor must be eligible to invest in G-Secs under FEMA Act 1999.
RDS account: Through the account, you get access to the G-Secs primary market and the order matching system for secondary market transactions in government bonds. You can trade in Government of India treasury bills, govt-dated securities, Sovereign gold bonds, and State development loans.
Fees and Charges: RBI does not charge fees to open and maintain the Retail Direct Gilt account and submit bids in the primary auctions. However, the investor bears the charges for the payment gateway.
Buying in the Primary market: Submit a bid under the non-competitive bidding segment to buy G-Secs in the primary market. On submitting the bid the platform displays the final amount. Set aside funds like you would for secondary market purchase. After the bid is accepted and securities allotted, they are credited to the account on settlement.
Investment: You can start investing with a minimum of Rs. 10000 and a maximum of Rs. 2cr in G-Secs.
Trading in the Secondary Market: If you want to trade in the secondary market for existing G-Secs, you must
- Use the link provided in the account to access the NDS-OM and select the security you want to buy or sell.
- Transfer funds to the designated NDS-OM Clearing Corporation account via net banking or UPI-linked account before trading hours or during the day.
- The platform allocates a funding limit to place a buy order based on the actual amount transferred.
- Any excess funds are refunded after the trading session ends.
- The funds in your UPI-linked bank account are blocked when you buy and debited upon settlement.
If you want to sell your securities, then
- The securities sold will be blocked while placing the order till the trade is settled.
- The sales proceeds are credited to your account on settlement day.
Before you get to set your RDG account and trade, let us make a note of all things Bond.
Understand bonds: Bonds are investments where you lend money to the government or a company for a specific time for regular interest payments. On maturity, the issuer returns the money to the investor. Bonds are also called fixed-income investments.
Coupon rates: The coupon rate is the fixed rate of interest paid to bondholders. If you invest 1, 00,000 (One-Lakh) and the coupon rate offered is 4% p.a. Then, the bond issuer will pay you 4000 per year until maturity.
Face value: The bond’s face value is the amount it will be worth on maturity. The interest payments depend on the face value.
Yield: The rate of returns on your bond, is yield. Though the coupon rate is fixed, the yield varies. It depends on the bond price in the secondary market and other factors. It is expressed as the current yield, the yield on maturity, and the yield to call.
Price: Bonds traded on the secondary market after issue have two prices. One is the Bid price, and the other is the Ask. The ask, is the lowest price the seller offers, while the bid is the highest price an investor is willing to pay for the securities.
Rating: Credit rating agencies like the CRISIL, ICRA, and CARE rate the creditworthiness of the bond and the bond issuer. Ratings like AAA, AA+, AA-, and BBB indicate the quality of the securities. They depend on the issuer’s financial strength and ability to pay the principal and interest on time. Such ratings allow an investor to pick the correct securities to invest in.
Duration risk: The bond’s price changes based on interest rate fluctuations. They are inversely proportionate. Per experts, the bond price will decrease 1% for every 1% increase in the interest rates. The longer the bond term, the higher its price is prone to interest-based fluctuations.
Types of Bonds: An investor can invest in corporate bonds, Government bonds, State bonds, Municipal bonds, gold bonds, and treasury bills.
Is investing in Government Bonds a good idea?
Yes, investing in G-Secs is a good idea; if you want a steady income with the least risk. These securities offer assured returns and stability as the GOI issues them. Moreover, these bonds may offer a better rate of interest than Bank FD.
We hope you now understand how the RDS account will work. The RBI is looking for tax sops for retail investors buying bonds through RDS. However, whether that happens or not is something we must keep an eye out for.
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