A New Investment Opportunity Emerges for Wealth Preservation

Many of us relate investing to capital appreciation or growth of wealth. We give less importance to the preservation of wealth. As you may know, asset allocation is the cornerstone of investing.

Currently, the equity markets are near their lifetime high. Even if you have a high-risk appetite, you shouldn't ignore wealth preservation or capital protection. This is more so in conditions where the margin of safety in the stock market has diminished.

Let's say you have earned good returns (i.e. generated wealth) from equities and you are less than three years away from achieving your financial goals. Then it is better to shift your asset allocation to debt instruments and focus on wealth preservation.

Doing this will ensure that your wealth is well-preserved if the stock market turns volatile or falls from its present elevated levels (which is quite possible).

In another scenario, say, your risk appetite has diminished (for whatever reasons), you have turned risk-averse, are in the conservation and protection phase of life, on the verge of retiring, or already retired.

You would want to earn a steady return with less risk. Then your main focus ought to be wealth preservation.

You may say, The interest rates offered on some traditional investments are low and look unappealing to invest at the moment'.

Yes, of course, interest rates have reduced significantly.

But investing in government securities can provide you decent returns with a high level of safety against credit risk.

You see, government securities (G-secs) include instruments like central government bonds, state government bonds, treasury bills, etc.

Recently, the RBI via its 'Retail Direct Scheme' has opened a new investment opportunity for retail investors. They can now invest directly in G-secs for wealth preservation through the 'Retail Direct Gilt Account'.

Let's understand the features, benefits, and functioning of the RBI Retail Direct Gilt Account.

RBI Retail Direct Gilt Account

To avail of the benefits of the 'RBI Direct Scheme' and invest in G-secs directly, you are required to open and maintain a 'Retail Direct Gilt Account' (RDG Account) with the RBI.

Through the RDG Account, you have access to both the primary market (buying G-secs directly from the RBI) and the secondary market (buy from other investors at the prevailing market price).

The RDG Account can be opened through an 'online portal' created specifically for the 'RBI Retail Direct' scheme. Once you register successfully, you get access to:

- Primary issuance of G-secs

- Negotiated Dealing System-Order Matching system (NDS-OM) through the online portal.

NDS-OM is a screen-based electronic anonymous order matching system for secondary market trading in government securities owned by RBI.

Thus, as a retail investor, you will be able to invest in GOI treasury bills, central government bonds, state government bonds, state development loans (SDLs), and sovereign gold bonds (SGB).

There are no fees to open and maintain the RDG Account with RBI. All you require to pay is a nominal payment gateway fee while trading in G-secs.

Who is eligible to open the RDG Account?

Any individual can open a Retail Direct Gilt Account provided that he/she has a savings bank account, officially verified documents for the purpose of KYC (viz. PAN, Aadhaar, Passport, etc.), a valid email id, and a registered mobile number.

The non-resident retail investors eligible to invest in government securities under Foreign Exchange Management Act, 1999 (FEMA), who are also eligible to open the RDG Account.

Is a joint holding permitted?

Yes. The RDG Account can be held jointly by you with another individual who meets the eligibility criteria to open the RDG Account.

What is the procedure to open the RDG Account?

It's a very simple process.

Register on the online portal by filling up the online form.

Use the OTP received on the registered mobile number and email id to authenticate and submit the form.

You will have to comply with KYC (Know Your Customer) guidelines in this process. Upon successful registration, your RDG Account will be opened with the details to access the account shared via SMS/e-mail.

The functioning of the RDG Account

The RDG Account makes it possible to participate in the primary issuance of G-secs (i.e. buying G-secs directly from the RBI) in small lots (say Rs 10,000).

Participation and allotment of securities in the primary market is as per the non-competitive scheme for participation in the primary auction of government securities and procedural guidelines for SGB issuance.

Only one bid per security is permitted, and after the submission of the bid, the total amount payable is displayed. No fee is levied by the aggregator for submitting bids in the primary auctions.

Only for what the securities purchased, the payment is to be made to the receiving office or aggregator either via net banking or UPI facility linked to the bank account.

On allotment, the securities will be reflected in the RDG Account on the day of settlement. In the case of a refund, the money will be credited to your bank account.

To trade in the secondary market, the order needs to be placed on the NDS-OM. The NDS-OM currently has Request for Quote (RFQ) or odd lot segment as dealing modes available for secondary market trading.

Before the start of trading hours or during the day, you are required to transfer funds to the designated account of CCIL (Clearing Corporation of India Ltd.) using net banking/UPI from the linked bank account.

For buy orders, a funding limit (buying limit) is placed. At the end of the trading session, any excess funds lying to the credit of your account is refunded. The securities purchased by you, will be credited to your RDG Account on the day of settlement.

Similarly, when you sell, the securities identified for sale will be blocked at the time of placing the order till the settlement of the trade. On the day of settlement, the funds from the sale will be credited to your linked bank account.

Keep in mind that as an investor when you trade in G-secs using the RDG Account, you will have to bear a nominal payment gateway fee.

Here are the seven key benefits of the RBI's Retail Direct Gilt Account:

1) The RDG Account provides the ease of transacting in G-secs which carry almost zero default/credit risk.

2) You can transact in small lot sizes and trade in securities across maturities, i.e. 91 days to as long as 40 years.

3) Facilitates you to create, manage your own G-sec portfolio and diversify across sovereign bonds as per your liquidity needs.

4) The securities in the RDG Account can even be pledged to avail of a loan in time of need.

5) You also have the online facility to gift government securities to other retail investors.

6) Can keep track of your G-sec portfolio with access to your account statement.

7) And in case you have any queries or grievances, they can be raised on the portal which will be resolved by the Public Debt Office (PDO) of the RBI in Mumbai.

The tax implications of the RBI's Retail Direct Scheme

The capital gains earned by selling G-secs and sovereign bonds in the secondary markets (before maturity) will be liable for capital gain tax along with indexation benefits (if applicable). Whereas the regular interest income received from G-secs will be taxable as per your income tax slab.

In the case of direct investing in G-secs, the capital gains will be calculated across securities traded by you, the investor in a financial year.

Whereas in the case of Gilt mutual funds, the capital gains are calculated for the holding period of mutual fund units, irrespective of the number of trades executed by the fund manager while managing the scheme.

To sum-up...

If you are an astute investor who wants to invest in G-secs directly and can manage the portfolio well by yourself, then the RBI Retail Direct Gilt Account is for you.

However, ensure that you understand the Indian debt market well with the macroeconomic factors that impact it. The RBI's Retail Direct Scheme is for well-informed investors.

While G-secs carry no credit/default risk, they may be prone to interest rate risk, especially in a rising interest rate scenario. Note that interest rates and bond prices are inversely related, whereas the yields and interest rates are positively correlated.

When you are structuring the portfolio, you need to actively track the interest rate direction and accordingly decide the maturity period for G-secs to buy.

Ideally, the maturity period of the securities should be picked based on their cash-flow requirements and coupon expectations.

If you feel you lack the skills and time to invest in G-secs directly, then choose debt mutual fund schemes considering your risk appetite and investment time horizon.

Mutual funds offer gilt funds under distinct categories like Short to Medium Term Gilt Funds, Constant Maturity Gilt Funds, Target Maturity Gilt Funds, etc.

Under Gilt funds, professional fund managers can actively pick the securities as per their expertise and macro-economic outlook. Nevertheless, take care to select the best Gilt Funds that can stand the test of time. Bear in mind that investing in debt funds is not risk-free or safe.

Happy Investing!

This article has been authored by PersonalFN - a Mumbai based Financial Planning and Mutual Fund research firm known for offering unbiased and honest opinions on investing.