Equities and Bonds are two of the most traded asset classes and are often combined together as part of a well-diversified portfolio. When buying equity in a company, the investor becomes a shareholder and can participate in the distribution of profits. When buying a bond, the investor becomes a creditor to the issuer and is entitled to a fixed interest along with the ultimate repayment of the principal. Equity gives high returns mainly because of the risk involved in it. Whereas bonds provide low but fixed returns with lesser or zero risk to the capital. In the current situation where the equity markets have become very volatile, investors are looking to diversify their portfolios with a good combination of equity and debt.
Government bonds with long-term maturities are finding takers who are looking for safe debt instruments that are liquid and more tax efficient. Sovereign papers that mature 25 to 40 years from now would fetch them returns of 7.25-7.35 per cent annually. Currently, 10 years fixed deposit with the State Bank of India gives returns of up to 5.5 per cent. After 10 years, investors face reinvestment risks due to uncertainty over the interest rates then. Similarly, post office deposits offer an annual return of 6.7 per cent but have a tenure of five years. Debt mutual funds offer indexation benefits if the investment is held for more than three years, but there are very few schemes that invest with a maturity period of more than 10 years. In all these cases, Government of India bonds appear to be a good option for long term debt investment.
On November 12, 2021, Prime Minister Narendra Modi released the Reserve Bank of India (RBI) Retail Direct Scheme. The scheme provides investors with an opportunity to invest in government securities in the primary and secondary markets in a safe and hassle-free manner. Government securities under the scheme include Government of India Treasury Bills (T-Bills), Government of India Dated Securities (Dated G-Secs), State Development Loans (SDLs), and Sovereign Gold Bonds (SGBs). The Retail Direct scheme offers retail investors the opportunity to buy securities directly and free of charge. These securities can be purchased on the Reserve Bank of India’s Retail Direct Platform with a minimum capitalization of Rs 10,000. There is no upper limit. Investors can buy these securities without the aid of brokers. This is a major development for retail investors and direct investment in long tenor government bonds has become real possibility for this group.
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