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Should you invest in G-Secs directly?

Shashikant Singh
/ Categories: Mindshare, Mutual Fund
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Should you invest in G-Secs directly?

Reserve Bank of India (RBI) in its latest meeting kept all the key policy rates unchanged; however, there is a significant announcement for retail investors. RBI announced that it will soon be launching a platform, called ‘Retail Direct’, which would help retail investors to access government securities both in the primary as well as the secondary markets. These G-secs are debt instruments issued by the apex bank on behalf of the central government to mop-up funds for the government. These securities can have a tenure ranging from a few days to 40 years.   

Retail investors, who seek the safety of their investment, may find it very attractive as they are guaranteed by the central government. The second thing that matters to an investor is the return on their investment.  In G-Secs, it is not easy to find the exact return that they are going to get. For example, there are securities issued with nomenclature like the 5.77 per cent 2030 bond, which talks of the interest paid on the face value of Rs 100 and would mature in 2030. The 5.77 per cent bond is currently trading at Rs 97.76, which means, if you buy G-Sec now and hold it till its maturity (2030), then you will get a return of 6.08 per cent on your returns.  If you compare this return with other small savings schemes such as National Savings Certificate (NSC), which is currently offering 6.8 per cent, it looks more attractive. Besides, any investment and interest rate accrued in this is not taxable. Any interest rate received on your G-Sec investment is also taxable. In case, you sell your G-Sec before one year, it will be taxed at marginal tax slab and selling after one year will attract long-term capital gain tax.   

Another important aspect that matters to an investor is the liquidity of his investment. Your investment can be converted into cash very easily and that too, with lower impact cost. G-Sec lacks a lot in this aspect as well. In the secondary market of G-Secs, there are around 90 government securities that are listed. Out of these, normally two-thirds of the trades are in the 10-year G-Secs, which are the current benchmark. So, if you are holding these securities, you can exit with minimal impact; however, if you are not holding these securities, it will be a tough task to get out.   

Though the final detail is yet to be revealed about direct investment in G-Secs, we believe at the current juncture, a mutual fund is still a good route to take exposure to G-Secs even if it means little lower returns than holding G-Secs directly.   

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