Splitting of govt bonds may not attract many: Experts

Reserve Bank's proposal to allow trading in bonds' principal and interest components separately may evoke little response from retail investors due to the complexity of the product, experts fear.     

The central bank had recently issued draft guidelines for separate trading proposal as part of its efforts to reform the country's bond market.     

Called separate trading of registered interest and principal of securities (STRIPS), experts said this move may not attract retail investors as the yield on investments are comparatively low.     

The splitting of bonds into principal and coupon as separate trading instruments is common in global markets but India is yet to introduce it.     

"While the attempt is to make sure that even small investors get an opportunity to participate in the G-Sec market, low interest earnings may not attract too many people," IndusInd Bank Executive Vice President Moses Harding said.     

Also, trading in G-Secs is complex compared to other investment modes like stocks, bank Fixed Deposits and mutual funds, Harding said.

Under the new guidelines, retail investors may be able to participate in the G-Sec market by investing small amounts but the low interest rates and complexity of product on Government securities may not appeal them, experts said.     

While government bonds offer low risk and reward, small investors tend to approach other low risk and high reward products like AAA rated corporate papers and bank FDs, which attracts 2-3 times higher return as compared to G-Secs, they added.     

At present, though retail investors are allowed to invest in government bonds, a minimum investment of Rs 1 lakh is mandatory.     

"For HNIs and institutions, Rs 1 lakh is not a big amount. Only those who prefer a zero risk investment mode but not high earnings usually go for G-Sec investment," Harding said.     

Splitting of government bonds means that retail investors can trade in their principal and interest components separately. This would give the flexibility to withdraw the interest component keeping the principal intact, a senior treasury official of a leading public sector bank said.

"Only big investors such as HNIs and banks largely use the G-Sec market to park the money in the long term. Where is the necessity for a small investor to invest small amounts as low as Rs 1,000 in G-Secs," the official said.     

Union Bank Chief Financial Officer, N S Mehta added that the bank is currently studying the new proposal and is yet to give its feedback to the apex bank.     

However, compared to bank FDs, earnings from G-Sec investments are not taxable, which may appeal certain class of small investors to invest long term in Goverment bonds, he said.