Here is why you should not buy G-secs (Government Securities) from retail platforms like Zerodha and NSE goBID and keep it simple with fixed deposits or debt mutual funds. Even if you wish to buy G-secs at the very least give several months for the platforms and the process to evolve before committing money. So let us start the basics. Before we begin, I posted a video review of Invesco India Midcap Fund with Morningstar yesterday. Do subscribe to the freefincal youtube channel to receive instant updates
What is this about?
On 23rd Nov. 2017, RBI opened the G-sec market to retail investors by allowing them to participate in “non-competitive bidding” in government securities and T-bills. Subsequently, Zerodha coin launched its trading platform and NSE has come up with an app and online platform NSE goBID for retail participation in G-sec with a minimum investment of Rs. 10, 000 and multiples thereof up to 2 crores.
What is non-competitive bidding on g-secs?
When RBI announces G-secs, the price is determined in an auction by banks and institutional investors (big players). While retail investors can now participate in this auction, they cannot bid for these bonds. The price allotted will be decided by the bids of the big players.
What is the difference between a T-bill and a G-sec bond?
A T-bill or treasury bill is a short-term bond (less than 1Y) that does not offer any interest. If the value of the bond is Rs. 100, you can buy it at a discount for Rs. 95 (say, as determined by the auction) and upon maturity, you will be paid Rs. 100
A G-sec bond will of longer duration (even up to 30-40 years!!) and an interest will be paid on the face value of the bond twice a year. You can see the current listing at the NSE site
How are T-bills and G-sec bonds taxed?
- The gain made in T-bills (short-term capital gain) is taxed as per slab
- The interest received from G-sec bonds is also taxed as per slab under “income from other sources”
- If you sell a G-sec before 3 years in the secondary market then the capital gain (if any) is considered short-term and taxed as per slab. If sold after 3 years, the capital gain will be long-term and taxed at either 10% or 20% with indexation of the purchase price
What the risks of retail participation in T-bill and G-sec bonds?
Yeah, yeah, what these retail platforms are saying is right. A T-bill or a G-sec is safer than a fixed deposit and obviously a debt mutual fund. This is true only if you buy the bond and hold it until maturity.
The main risk is one that investors least understand: liquidity. For the big players who trade in crores, the G-sec market is quite liquid. Retail participation here has just started and my guess is it will take months if not years for robust liquidity among retail players IF enough participate.
It is one thing to buy a T-bill and sit it out until maturity and quite another to buy a 5Y G-sec and wait because you cannot exit (since you need the money or since you want to make a profit). It is too early for retail investors to aim for profit from trading. In fact, Zerodha started selling G-secs before the bonds were available for sale in the secondary market (see above link)! So tread with caution. My suggestion is to stay away from these, but even if you must buy, look at the trading volumes before you buy your first bond even if you do not wish to sell in the middle.
The big players g-sec market is liquid because someone will not mind taking on a loss as they will need the bonds. The rules of the game for retail investors will be quite different. Another problem with secondary market buying is the calculation of effective gain or loss due to complicated bond market terminology. See for example: How to buy tax-free bonds in the secondary market For bond math, use this RBI resource.
Why are you saying do not buy G-secs?
If you are someone who likes peanut benefits like cash back, discounts and reward points, the following will not be appealing to you. So do not listen to me, go ahead and buy G-secs. If you are someone who would like to focus on the big picture (of getting wealthy) and discard small snacks, the following might interest you.
There is no great benefit in buying G-secs unless you are able to sell them at a profit. The benefit for buying and holding is only a few basis points more than a bank fixed deposits and considering the typical retail investor ticket sizes, the actual benefit is also small (if not smaller).
T-bills are short-term instruments. The little extra that you can get from them (not always) will be no significance to your cashflows or wealth. As for G-bonds, why would you want interest payment that will be taxed as per slab twice a year when you are earning? Why lock-in money with uncertain liquidity?
Sure, a retiree can afford to buy long-term G-bonds and get the bi-annual payouts but must ensure enough money to meet daily needs and handle long-term inflation. Locking a significant sum is not the way to go. And if the sum is not significant, the interest payout is not of much anyway.
Fact is, most of us are compulsive shoppers. We see a nicely formatted brochure with the correct anchor hooks like “safe” and “sovereign guarantee”, then we start thinking, “why not have some exposure to that?”. It is like a glutton given the keys to a bakery and wants to taste every type of cake.
A financial product must make a significant difference in your life and G-sec will not do that at least not for the buyer and holder and certainly not in India when we have very good bank FD rates and liquid funds and arbitrage funds with favourable taxation.
I would rather spend my time on looking for a good liquid fund or arbitrage fund – see this for suggestions: My Handpicked Mutual Funds September 2018 (PlumbLine), than buy G-sec bonds just because I can buy them easily at the click of a button.
Unless you are super paranoid about safety, T-bills and few years G-sec bonds do not make any sense. Unless one can trade freely in these, understand bond math and sell for good profits at opportune times, buying G-secs do not make any sense at this point in time.
Most people do not take my words seriously, even if you are one of them, I would strongly suggest that you wait for the retail market to mature before jumping in.
What about gilt mutual funds?
Short-term gilts funds as a category are dead and that is such a pity. Long-term gilts funds can be used for super-long-term goals provided that the investor rebalances with equity both ways frequently.
Watch: Invesco India Midcap Fund Review with Morningstar India