In the recent past, a few Non-Banking Financial Corporations (NBFCs) raised money through the issuance of Non-Convertible Debentures (NCDs). Those enjoying good credit ratings witnessed an overwhelming response to their issuances. However, falling interest rates on bank Fixed Deposits and shallowness of the Indian bond market leaves individual investors in the fixed income category with fewer choices. As a result, primary issuances of companies enjoying high credit ratings get a tremendous response. But the problem is, over subscription often leaves many investors high and dry. Moreover, no matter how good a company is, you can't invest in it for a longer time duration as the distant future is always uncertain.

If somebody asks you to invest in an "AAA" rated company for 5 years, you will be comfortable with the offering, if the interest rate is higher than that offered on the bank FDs. However, if someone asks you to bet on the company for 15-20 years, you will probably feel apprehensive, as you don't know what will change for the company in years to come.

The RBI has taken an important decision to end this quality crisis and offer investors a variety of choices. It's decided to open up the secondary market of Government Securities (G-sec) for individual investors. As of now, the market is dominated by the institutional investors such as banks, mutual funds, and insurance companies among others. The ones who have demat accounts can buy and sell G-secs in the secondary market.

Should you exercise the option?

Since G-Secs are backed by the sovereign guarantee, credit quality is out of the question. However, you are still exposed to the interest rate risk. G-secs, like other tradable bonds, share the inverse relation with the interest rates in the economy. When the rates are moving down, the G-sec prices move up, and the opposite also holds true. So if you have decided to buy G-sec in an individual capacity, you need to take into account factors such as interest rate movement, G-sec prices, yields, and years left in the maturity to name a few. .

It's been observed that, if you compare G-sec yields vis-à-vis bank FD rates, for the maturities upto 5 years, FDs offer you better rates without exposing you to any risk of change in the principal value of your investment. Unlike that, when you invest in G-secs, the worth of your investment fluctuates regularly.

To earn superior returns as compared to those generated by FDs, you need to lock in your money for a relatively long term, say 10 years. Many investors may find it uncomfortable to stay invested for the long haul because this exposes them excessively to the interest rate risk. What's more, there's no tax incentive to invest in G-sec directly.

Considering the positives and negatives, PersonalFN believes investors would be better off if they avoid investing directly, especially in long term G-secs. You have another option of investing in dedicated G-sec mutual fund schemes. PersonalFN believes, you may prefer to avoid them as well.

Instead, you may invest in dynamic bond funds if you have a time horizon of 3 years and above. They enjoy the flexibility to invest across the spectrum of securities, including G-secs and the range of maturities. PersonalFN is of the view that, considering the risk involved in debt funds,you shouldn't commit more than 20% of your fixed income portfolio to debt funds with longer maturities. Always try to invest in funds with a maturity profile that coincides with your time horizon.

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