“G-Sec investment should be seen as a part of the overall portfolio diversification strategy.”
February 7, 2003
In a conversation with Personalfn, Ms. Usha Thorat, Chief General Manager – Internal Debt Management Cell at the Reserve Bank of India discussed the opening up of the government securities market to the retail investor.
PFN: Please can you share with us some statistics pertaining to the government securities market – total face value of paper in issue, how much of it is being traded in the market on a daily basis, what are the kinds of yields that are prevalent?
Ms. Thorat : Outstanding Central Government dated securities – Rs 6,600 bn (face value), Daily inter-bank trading volume at Rs 45 -50 bn (face value)
Currently, 5 year yields are around 5.75%, 10 year yields are at around 6.00%, 20 year yield is around 6.45%.
PFN: What was the rationale behind opening the G-Sec market to the retail investors?
Ms. Thorat :
Enlarge the choice of investments available to the investor
Investment is free of credit risk
Return is comparable to those on bank deposits
Widen investor base Retail investors are largely buy & hold type. Potentially, in the long run, it can act as a buffer against volatility and even lower cost of borrowing for the government.
PFN: How can a retail investor go about investing in government securities today?
Ms. Thorat :
Non competitive bids in primary auction through a bank or primary dealer offering this service - Dated government of India securities, up to Rs 10 million, are available to the investors. (Some PFs can also participate in the treasury bill auctions as non competitive bidders).
Through stock exchanges in the secondary markets
Through PDs and banks offering retail services in gilts
PFN: What type of government securities is available for the investor in the retail market? What are the different types of government securities that may be introduced in the retail market going forward?
Ms. Thorat :
Currently, on the SEs only dated GOI securities are available. In due course GOI treasury bills and dated State Government securities will become available.
However, all securities can be purchased and held by a retail investor in the OTC market.
Going forward, we expect ZCBs to be popular amongst the retail segment; hence introduction of STRIPS will be eagerly awaited.
PFN: Government securities are generally referred to as a risk free investment. Please can you share your views on this?
Ms. Thorat :
GOI securities are free of default risk. But investment in GOI securities entails taking price risks arising out of movements in interest rates. Usually price volatility in Government securities is lower as compared to equities.
PFN: G-secs are a little more complicated than their peers (FDs, bonds, post office schemes). Understanding interest rate fluctuations and the critical economic factors like fiscal deficit, forex reserves and the global oil scenario are just some of the prerequisites. Do you believe the retail investor is geared to handle this?
Ms. Thorat :
Retail investors / Investors buying for regulatory reasons, who are largely buy and hold type need not know about the macro-economics. The only thing they need to know is the face value, coupon of the bond, total price payable (inclusive of accrued interest) at the time of acquisition of securities, maturity date, which are fairly straight forward.
PFN: Does the Reserve Bank of India publish information on government securities that may be of help to retail investors looking at investing in the market? How can the retail investor procure the same?
Ms. Thorat :
Inter bank trades on a live basis are available at www.nds.rbi.org.in The trades settled during the day at CCIL/PDO are available the next day through the press release.
PFN: Please elaborate on how you believe g-secs can find a place in the retail investor’s portfolio.
Ms. Thorat :
Some of the reasons why people will invest are - Income tax relief on coupon income up to Rs 3,000/- p.a., no TDS and free of credit risk. Focus will shift to g-secs once the rates on the small saving schemes are aligned to the market or the tax sops on them withdrawn.
PFN: What is your advice to the retail investor who is looking to make a beginning by investing in g-secs?
Ms. Thorat :
G-Sec investment should be seen as a part of the overall portfolio diversification strategy.
