RBI and the Direct Debt Fund Platform

It is a known fact that the equity market has its own process and the buyers and sellers approach accordingly to carry out the transactions. All the commodities-be it metal, crop or anything else have their own markets. People from across the globe use the internet to buy and sell products. COVID-19 has further extended the scope of online transactions.

Understanding the technology to carry out financial transactions by using the internet is not a new thing anymore.  It is very easy to check your bank account, transfer amounts and perform other online transactions for most of us. 

However, before it was not easy to have direct access to a few things. People had to approach the specified agencies to complete formalities. If we talk about investments, it used to involve a lot of paperwork. Online platforms have eased many things. Yet government securities were not made accessible to retail investors. G-secs have been a popular mode of investment and preferred by those who are risk averse and want an assured source of fixed income.  

What is the RBI Retail Direct Scheme?

Retail Direct Scheme is a one-step solution to facilitate investment in Government Securities by individual investors. An individual investor can now open a Gilt Securities Account or “Retail Direct Gilt (RDG) account with RBI.

On November 12, the Reserve Bank of India opened the route for retail investors to invest directly in government securities. It is called RBI’s retail direct platform. Retail investors can now access the G-secs through this medium. Opening an RDG account will allow individuals to buy G-secs directly in the primary market(auctions) and in the secondary market as well.

This is an important milestone in the growth of the G-sec market. G-secs are now more accessible to the ordinary man by simplifying the investment procedure. There are no fees for opening the account or submitting the bids in primary auctions.  The investor will be responsible only for the gateway fees incurred while funding the purchases. 

How will it benefit the RBI and the Union Government?

The government can now better manage its financial requirement to carry out public expenditure through this additional source of funds. This step will deepen the bond markets which were limited to financial institutions alone previously and will also lead to better price discovery and yield curve. Use of the digital payment technology that any retail investor is well versed with, will help in strengthening the financial market. The opening of G-secs to retail investors will put them on par with the already robust corporate bond market. 

Who can open a Retail Direct Gilt Account?

Retail investors or individual natural persons can open an RDG account. Non-Resident retail investors are also eligible to invest in G-sec. An individual can open only one RDG account. This account can be opened singly or jointly with another retail investor who meets the eligibility criteria. The second joint holder may also open an individual RDG account. 

The process has been made smooth and takes less than ten minutes,once all your information is kept ready. The following shall be required for using the portal:

1. Verified KYC
2. Permanent Account Number or PAN
3. A scanned signature
4. The individual should have a Rupee savings bank account maintained in India. A scanned cancelled cheque of the bank of your choice is required for giving effect to the transactions. 
5. Nomination is required.
6. Valid email id.
7. Aadhar number with registered mobile number linked to it.

If you keep all the above details ready, you can login to https://www.rbiretaildirect.in. You will get a few one-time passwords while opening a new account. 

The stepwise guide to open an RDG account:

1. To open an account, the investor will have to furnish details like full name, PAN, mobile number, e-mail address, residential address, savings bank account number, etc. and specify a login name. Mobile number and email address will be authenticated using OTP and all further customer requests and services will be OTP based.
   
2. For joint accounts, the PAN, e-mail address and phone number of both holders will be required.
   
3. Once these details have been provided, you will get a reference number to track your application.
   
4. You may now initiate your Know Your Customer (KYC) verification process. In case your date does not exist in the CKYC database, then you have to opt for the video KYC method. Your progress during the KYC verification process will be saved so that you do not have to re-enter the details if you start again. The link that you received in the email after registration can be used to access the saved progress. You have to keep clicking on ‘Next’ to move ahead without re-entering the previously saved details.
   
5. In case of joint accounts, the KYC verification will be done for both the holders.
   
6. It will be mandatory for the investor to fill in the nomination details at the time of opening of the account.
   
7. The savings bank account of the customer will be linked to their Retail Direct account by crediting a token amount into their bank account and verifying the same.
   
8. Once the KYC is successful, an RDG account will be opened in the name of the investor(s).
   
9. Information related to account number, login id & password to access the Online Portal will be made available to the customer on their registered e-mail id.
   
10. In case of KYC failures, the individual can make a new application or resubmit application after making necessary changes.

Registered mobile number and e-mail id on the portal can be changed.The account can be opened and maintained with RBI free of cost.

The CKYC process

1. Enter your PAN card number and date of birth to retrieve details available in CKYC.
   
2. Provide address details, scanned copy of your signature, bank account details and nominee details.
   
3. Authenticate the user agreement form using Aadhaar by submitting the OTP sent on your mobile number linked to Aadhaar.

The video KYC process

1. Upload a scanned copy of your PAN card.
   
2. Download the XML version of your Aadhaar from the UIDAI website and upload it. Use the 4-digit pin specified while downloading the XML version.
   
3. Provide address details, scanned copy of your signature, bank account details and nominee details.
   
4. Complete the video KYC by choosing a time slot for later or immediately, depending on the availability at that point of time.
   
5. Authenticate the user agreement form by Aadhaar using the OTP sent on your mobile number linked to Aadhaar.

Nomination: Anyone can be nominated as a nominee by a holder of G-secs(the nominee should be eligible to invest in the loan as indicated in the Government Loan Notification). There can be a maximum of two nominees. The investor can change the nominee via the portal.

In a situation where nomination has been made in the names of two people and one or both of them dies, the surviving nominee is entitled to the G-sec and payment on it. 

The facilities available on the RBI Retail Direct Portal

1. It allows buying G-secs through primary auctions(non-competitive segment only)
2. Buying and selling G-secs is facilitated in the secondary market.
3. Buying and selling Sovereign Gold Bonds (SGBs) in the primary and secondary market.
4. Investor services such as account statement, nomination facility, pledge/lien, gift transactions, grievance redressal and managing profile like contact details etc. 

Is it advisable to invest in G-secs using the direct platform?

It is found that transacting and trading in bonds is difficult when carried out using this platform. The difference between Government securities that mature on different dates need to be understood by the investors. The impact of interest rates on yield is a tough task. Selling retail lots takes more time. For example, selling a Rs. 1 crore lot takes more than a day. Not all the G-secs are liquid enough. Only those securities have liquidity that have certain maturities. Another noteworthy point is, mutual funds earn better yields as well as are tax efficient. Similarly short term fixed deposit rates are also better than G-secs.  So whether to invest in G-secs itself poses a question. 

If you desire to hold g-secs till maturity then you can go for RBI Retail Direct. These securities have a higher expense ratio and that results in diminishing returns. The interest rates are already low, and if you park your funds in g-secs for a longer tenure, it will be unfruitful. Opting for a direct platform will definitely save cost but it will take some time for retail investors to be accustomed to this platform. 

The returns on G-secs are dependent on various features of the securities. There is ‘Government Securities Market-A primer’ , published on RBI website which can be checked to know the factors affecting the returns on G-secs.

How to buy and sell securities through Retail Direct Platform-

Buying-There are two ways to buy Government securities using Retail Direct platform:

1. By placing a bid in the primary auctions of dated G-Sec, T-Bills and SDLs (Non-competitive segment only, i.e., by only entering the desired amount of securities, without entering a price). 

For Sovereign Gold Bonds (SGBs), you may place a bid during the subscription windows announced by RBI on its website. 

For step-by-step details on bidding in auctions, you may refer to the User Manual on the Retail Direct Portal.

2. By placing a buy quote in the secondary market portal.

Selling-You can sell securities by placing an offer (sell) order in the secondary market portal. You must have the security in your account before you can sell that security.

Details about primary auctions: The primary auctions are conducted generally on specified days of the week as given in the table below, days may differ due to holidays or other considerations. Half yearly indicative calendars are published on RBI website for Government of India’s dated securities and Sovereign Gold Bonds whereas quarterly indicative calendars are published for Treasury Bills and State Development loans.

The minimum amount that can be invested in Government securities:

The following are the maximum limits applicable to dated G-Sec, T-Bills and SDLs if they are purchased through the non-competitive segment of primary auctions.

For Sovereign Gold Bonds (SGBs) – An individual may not subscribe to more than 4 kg of SGBs per fiscal year. The annual ceiling will include bonds subscribed under different tranches during initial issuance by the Government and those purchased from the Secondary Market.

The Government Securities that can be invested in through the Retail Direct Platform-

• Government of India Treasury Bills or T-Bills: These are short term government bonds. They are issued for maturity within one year’s time frame. The investors do not get coupon payments. The difference between the face value and the discounted value is the profit for the investors. These are issued in three categories-91 days, 182 days and 364 days.
• Government of India dated securities or dated G-sec: They come with varying rates of interest. The benefit is in the form of interest paid on these bonds. These are termed as “dated” because of their predetermined maturity date. The RBI auctions these bonds. The types of dated government securities include Fixed-Rate Bonds, Floating Rate Bonds, Zero Coupon Bonds,Capital Index Bonds, Inflation Indexed Bonds, Bonds with Call or Put Option, Special Securities, and STRIPS.
• State Development Loans or SDLs: To meet the budgetary requirements, the State Government issues these bonds. The RBI facilitates the issue through a negotiated dealing system. The government issues security every two weeks. The interest rate of SDLs is higher than the Dated Government Bonds. Though it is known only during the auction. 
• Sovereign Gold Bonds or SGB: SVBs have their prices linked to the price of gold. The nominal value of the bond is calculated based on the previous week’s simple average closing price of 99.99% of purity gold. Indian Bullion and Jewellers Association Ltd. publishes the price list. The denomination of these bonds is in terms of one gram of gold. 

Who should invest in Government Bonds?

By investing in market-linked instruments, there is no guarantee as to capital appreciation. So for those who do not have any experience of investing in such securities, government bonds offer them an option to safely invest their money. The overall risk is diluted and they act as a long term investment option too. Government has taken several measures to increase the understanding and popularity of these securities among retail investors. Through Non-Competitive Bidding for certain g-secs, the market participants can easily place their minimum bid online. Now with the direct retail scheme, it has become readily accessible. Those seeking regular income at minimum risk find them attractive. Excess funds can be parked in government bonds and become worry-free.

The advantages and disadvantages of using direct platform are further explained here:

Advantages-

• Government bonds are very popular due to their risk-free nature. They offer decent yields for longer duration. 

• They come in varying tenures from 91 day treasury bills to 40 year bonds. The 10 year g-sec is the most popular. Depending upon your investment objectives, you can choose from these bonds either for short term or long term. At different points on the yield curve, G-secs offer an attractive option for investors who prefer low risk investment options for longer tenure.

• As they are guaranteed by the Government of India, there is always an assurance that the principal sum of money shall be returned on due dates and there shall be no default on payments. They are considered credit risk free in the context of the domestic market.

• If we look at the features of g-secs, then they start at Rs.10,000 and are stored digitally. Those who need a regular income, find this feature attractive.The interest on government bonds is disbursed every six months to bondholders. It provides an opportunity for the bondholders to earn regular income by investing their surplus funds. 

• G-secs have reasonable liquidity and can be transacted on NDS-OM. Due to the newly introduced direct platform, the investors can now easily participate in both the primary and secondary markets.

• G-secs are a good option to diversify your portfolio and reduce the risk for retail investors. It mitigates the risk of the overall portfolio because g-secs are risk-free investments. 

• When the interest rates are moderate, there is a chance to book capital gains because there is an inverse relationship between bond price and interest rate.

• Retail Direct Account is totally free of charge and the charges which otherwise they are liable to pay for investing through aggregators can be completely avoided. Intermediaries are not at all involved. 

Drawbacks- 

• G-secs face duration and interest rate risks. When the interest rates go up, the prices of the bonds fall and vice versa. However, the interest rate becomes manageable if the bonds are held till its maturity by receiving all the interest payments. 

• The interest earned on government bonds is relatively lower in comparison to other investment options like equity, mutual funds, corporate bonds etc. 

• G-secs are not tax-efficient because the interest received gets taxed at the rate applicable to you as per the prescribed slabs. Those who are in the higher slabs tend to pay more tax because of this reason.

Talking about the direct retail platform the bonds will be allotted to an investor on the average bid price. This means that when you enter a purchase amount, it will not be the buying price. This is a primary auction with a non-competitive bid. Things thus become complicated. You should know the days to bid for specific securities. Buying still is simpler than selling through this competitive bid process. For selling one has to transfer the securities to CCIL, enter the bid price and without the presence of a market maker for small lots, you will not come to know what price you will end up getting. Especially for smaller lots it is difficult to know what the price will be. 

The other options to invest in-

The investment strategy for any investor would depend on his/her individual preferences based on factors like their requirement of funds, risk-taking ability and tax structure. Here is a table showing a comparison between FDs, Debt mutual funds and G-secs. 

Though the direct platform for retail investors could have its own benefits but it is still an emerging place and already has its own set of disadvantages too. You may continue to earn profits through your own experience by investing in other forms of investments. It could be fixed deposits, mutual funds etc. Risk averse investors usually cling on to safer modes of investments. Gilt funds are yet another option. Gilt funds come with an expense ratio of anywhere between 0.1-1 percent of the amount invested. If you match your holding period with the average maturity period, there is no guarantee you will not face price fluctuations. It happens on a daily basis. 

When Gild funds are held for more than three years, the long term capital gains earned by selling them shall be taxable at 20% after allowing indexation benefits. Those who fall into higher tax slabs get a chance to be taxed at 20% for the gains they made by holding and selling the gilt funds for more than three years. Selling them directly will not result in any indexation benefits. If you sell g-secs after a year, LTCG shall be charged @ 10% without any indexation benefits. Whereas in case of gilt funds, interest amount also gets invested and indexation is allowed on that amount too. 

Debt funds invest in fixed income securities issued by the government and companies. They are relatively stable investments, high on liquidity and offer reasonable safety. If you invest in debt funds for a longer period, they prove to be inflation efficient. 

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Krishna Rath is a SEBI Registered Investment Adviser, and since 2015 has been educating netizens on investments and insurance. Krishna is a fee only SEBI RIA and is Odisha's first SEBI RIA. With background in IT, Krishna is changing the advisory space with new innovations in AdvisoryTech.

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