Pitching G-Secs as an alternative option for retail investors, a challenging task

Retail Direct. That is the name chosen by Reserve Bank of India (RBI), India's apex bank, for the window it wants to create for ordinary investors, who intend to transact in government securities (G-Secs). There is no doubt that the move has found approval on many fronts. However, spurring retail investments towards G-Secs (investment in government securities, which are considered to be safer than bank fixed deposits (FDs) as they are guaranteed by the government of India) is no mean task - there are more challenges than one, the foremost of which is the general absence of awareness about these securities insofar as the small participant is concerned. This is notwithstanding the fact that in case of G-Secs, there is no tax deduction at source (TDS) like bank FDs and one can pay taxes as per one's income tax slab at end of the financial year. Also, while the bank FDs have a maximum tenure of 10 years, G-Secs offer attractive interest rates of up to 40 years. Speaking to Bizz Buzz, Nilanjan Dey, Director, Wishlist Capital Advisors, a leading research-based wealth management firm, explains on the nitty-gritty of investing in G-Secs

That retail is an extremely sensitive segment, and this investing fraternity made up of householders and other average investors already have a number of smart options before them. The most challenging matter is the ability of the G-Secs market to appear before them as a solid alternative, as another stable destination for their surplus money

'G-Secs are an investor-friendly product' is the message that generally needs to be disseminated. In fact, the investing public, and not large institutional players alone, must be made conversant with their truly useful nature

In what can be billed as a 'major structural reform', the RBI on February 5, said that it will give small investors direct access to its government securities trading platform. Retail investors can now directly open their gilt accounts with RBI, and trade in government securities. Before getting into the merits and demerits, it's time to look at the track record, so far. What has been achieved so far with regard to investments in G-Secs?

Well, Retail Direct is the latest among the initiatives spearheaded by the authorities in recent times. I can recall some of the more pertinent ones, such as the granting of non-competitive bidding in primary auctions. Besides, the regulatory body has allowed exchanges to route primary purchases and permitted a clear investment window in the secondary market.

The point is, while these measures have together acted as a catalyst of sorts, a lot remains to be done in order to make them truly meaningful for the contemporary investor. Remember, the stakes are really very high because the G-Secs market plays an extremely critical role. After all, the government has a bold borrowing programme for the financial year 2022 to execute.

What is the likely nature of the new facility?

The market hopes the government will help create a wider investor base with regard to G-Secs. The banking authorities have indicated that details of the proposed retail window will be issued separately, so the concerned quarters are waiting for the particulars to be notified. The debt space has lately witnessed considerable reforms. I can tell you that controls on prices of assets have been eased considerably. The market is eagerly waiting for improvement in liquidity and the arrival of new participants.

I'm sure you would like increasing number of new players foraying into this field. So, how can new players be encouraged?

All issues related to transparency must be addressed satisfactorily. Already, trading systems have been strengthened, and we must explore the possibility of fortifying them further so that margins of errors turn narrower and, eventually, establish a completely fool-proof transactional environment.

One fondly hopes that some innovative products should get rolled out too. These will truly trigger interest in the G-Secs market so as to attract a set of fresh players. You know, if you introduce greater variety, you will enliven the market considerably.

'G-Secs are an investor-friendly product' is the message that generally needs to be disseminated. In fact, the investing public, and not large institutional players alone, must be made conversant with their truly useful nature. For far too long, this space has been occupied almost solely by commercial banks, insurance companies and the like. It is time to ensure greater diversity among participants.

What should retail investors, who are keen on G-Secs, bear in their minds?

You will appreciate that retail is an extremely sensitive segment, and the investing fraternity made up of householders and other average investors already have a number of smart options before them. The most challenging matter is the ability of the G-Secs market to appear before them as a solid alternative, as another stable destination for their surplus money.

In the G-Secs space too, there are a number of choices. One may, for instance, opt for dated government paper if one has a solid, long-term view. Else, there may also be a clutch of shorter term options. I mean, all these securities should be scrutinised carefully (in terms of their maturity profile and other vital metrics) before choice is exercised. And such choice too should be based on need. As I always say, look at your investment horizon and select the product you think will best suit your objective. The product should match your requirement.

But retail investors can simply go to mutual funds, can't they? So…

Yes, of course, such a choice is always open to them. Mutual funds do have a number of positive, convenient features to offer. A typical retail participant cannot be entirely expected to spend enough time on the myriad options before him. Tasking a professional fund manager, therefore, can be a perfectly natural inclination - and perhaps, for numerous small investors, that will be a more prudent route to take.

However, even then, retail investors need to be aware about broad but formidable issues such as liquidity. A mutual fund that indulges in G-Secs has an open-end structure. An investor can exit when the time is ripe or, to put it more crudely, whenever he wants. There are risks, of course. However, every class of investment, G-Sec or otherwise, has its own risk. There is the tricky issue of credit risk in the debt market. G-Sec investors, who know the securities are backed by the sovereign, do not really have a lot of worries on that front.

Nevertheless, interest rate risk can't simply be wished away. I must mention here that interest rate in India is right now at an extremely critical juncture. It is a story waiting to be revealed, and G-Secs investors like all the others cannot afford to be nonchalant about it.