In the context of investment matters, a Mint report states that Indians invest approximately Rs.60 trillion every year. Of this, around 50% of household savings is invested in real estate and about 15% each in bank fixed deposits (FDs) and gold.
Many investors prefer the safety and comfort of physical gold even though there are alternatives to this asset class in the form of gold funds and sovereign gold bonds. As for FDs, a far superior alternative, with better safety and security features, is government securities, particularly treasury bills (T- bills).
Basically, in the post-pandemic period, the practice of saving and investment habits among people has undergone a sea change.
Most of the individual investors have moved from traditional investment options to new-age investment products to beat inflation and make quick returns. Mostly, they take the route of the capital market where they park their money in stocks and bonds to create wealth.
However, there are still many investors who are risk averse and continue to still bank upon the traditional investing options such as bank fixed deposits etc.
There is also a good section of investors who explore a mix of both traditional and new-age investment options to minimize risk while looking for higher returns.
Traditional investment options, of course, offer security and comfort to the investors for being low risk instruments. But these instruments have been found generating negligible wealth. In fact, the traditional investment products have been delivering negative returns when inflation rules the market. Once the investors started understanding the exciting investment options backed by the fusion of technology & money management, we witnessed a rush of new raw investors in millions boarding the capital market platform to reap the benefits of positive returns. Notably, the new-age investment products are innovative, well-diversified, and provide the right mix of risk and return. The investors can align these investment options with their financial goals and generate positive inflation-beating returns.
New-age investment options can be utilised for the long term as well as for short-term requirements. However, to explore these options, the investor should have a higher risk appetite. In fact they should invest in options that match their risk appetite.
In this major shift of investors from traditional investment options to the new-age options, we will find that the modern-age investor’s portfolio is spread across various asset classes. Mutual funds and equity remain common across all investor groups. Investors have also started moving towards alternative investment avenues like Gold ETFs, real estate, cryptocurrencies, unlisted equities, and many more.
So, one of the key arenas for investors is the capital market – a market for equity and debt (bonds). This is the market where companies and governments raise funds for their activities. Businesses(companies) may decide to raise funds through equity offerings on the stock market or through debt in the form of corporate bonds. While governments may issue debt in the form of government bonds.
Within the capital market, we have a primary market and a secondary market. A primary market exists when a company or government first places its securities on the market for sale. In contrast, when securities, equities, or debt instruments are already available on the market and are being traded, then a market is known as the secondary market.
The capital market is part of the financial market, which includes the money market. In the money market, funds are raised on a short-term basis by issuing debt securities such as treasury bills, commercial papers, etc. Main players in money markets include banks, among others.
However, the government on November 12, 2021 opened the securities market for retail investors through the Retail Direct Scheme. The scheme paved the way to strengthen economic inclusion as middle-class families, small business owners, and senior citizens are now able to invest their small savings directly and safely in government securities.
What are the features of Retail Direct Scheme?
The scheme is a portal that facilitates investment in government securities by individual investors. Individuals can open a gilt securities account—retail direct gilt (RDG) account—with the RBI on www.rbiretaildirect.org.in. The scheme directly facilitates an individual investor to invest in 4 kinds of government securities including Government of India Treasury Bills (T-Bills), Government of India Dated Securities (Dated G-Sec or Government Bonds), State Development Loans (SDLs) and Sovereign Gold Bonds (SGB)
Treasury bills or T-bills are short-term debt instruments issued by the Government of India. So, through these instruments, the government borrows for a short-term period. Presently, the government issues these T-Bills in three tenors, namely, 91-days, 182-days, and 364-days.
Government bonds are long-term debt instruments issued by the Government of India. Through this, the Indian government borrows for one year or more.
State Development Loans (SDLs) are long-term debt instruments issued by various state governments in India. Simply put, through SDLs, state governments borrow for one year or more. State governments don’t issue T-Bills. So they issue bonds that mature after at least 1 year.
Sovereign Gold Bonds (SGB) are government securities denominated in grams of gold. They are substitutes for holding physical gold.
As already stated, the capital market constitutes primary and secondary markets. An investor can invest in the above-mentioned government securities directly through both the markets. Investing via primary market means buying government securities through primary auctions. Investing in the secondary market means buying and selling G-Secs from other investors and is similar to trading shares in the stock market.
Meanwhile, opening an RDG account will allow individuals to buy Government securities directly in the primary market (auctions) as well as buy/sell in the secondary market. For the retail investor, the government securities offer an option for long-term investment.
Retail investors defined under the scheme can register and maintain an RDG account. Investors need to have a rupee savings bank account maintained in India- Permanent Account Number issued by the income tax department- Any officially valid document to meet know-your-customer norms- Valid email id and registered mobile number.
What are the benefits for retail investors under the scheme?
Investments in government securities in the domestic market context are risk free and carry no credit risk. The yields on this investment are decent over a long period of time. Government securities (G-sec) offer the prospect of capital gains when interest rates are moderate. One, however, must be conscious of market risks that could cause losses in case the interest rate cycle reverses. It also offers reasonable liquidity. Retail investors can participate easily in the primary and secondary market with the introduction of Retail Direct Portal.
Besides, investments in government securities would help in portfolio diversification and consequently reduce risk for retail investors.
The investor has to open a Retail Direct Account (RDA) without paying any charge and does not involve any intermediary. It would reduce overall transaction charges for individual investors in terms of the charges which they are otherwise required to pay for investing through aggregators or taking indirect exposure through mutual funds.
Who can open a Retail Direct Gilt (RDG) account?
Any retail investor in an individual capacity can open an RDG account. The individual is required to have a rupee savings bank account maintained in India, Permanent Account Number (PAN), any officially valid document (OVD) for Know Your Customer (KYC) purpose, a valid email id and a registered mobile number.
Non-resident retail investors are also eligible to invest in Government Securities under the Foreign Exchange Management Act, 1999.
It is pertinent to note that there can only be one RDG account per individual. The second holder in a joint RDG account may also open an individual RDG account.
Notably, the bank account details are required to settle the funds in case of any purchase/sale. Periodic coupon payments and redemption amount of the invested security will also be credited to this bank account.