Having The Gilts Edge

For risk-averse, high net worth individuals, who have traditionally been parking money in bank deposits, institutional bonds and corporate fixed deposits, besides the small saving schemes, here is another investment opportunity: government securities. Thanks to the Reserve Bank of India (RBI), retail investors can now take part in the auction of government paper or gilts.

Even though the window opened for them on December 7, no auction has taken place since then. The minimum bidding amount is fixed at Rs 10,000 and the maximum is capped at Rs 1 crore. The facility is restricted to select auctions for the time being and small investors can invest in up to 5 per cent of the total size of the issue.

Gilts are the safest instrument to put your money in: with the government being the issuer, there is no chance of default on interest payment. That apart, the market with Rs 4,000 crore of average daily transaction volume gives the investor the opportunity to encash his holding. In the case of a corporate bond, the chance of encashing it is low since the daily trading volume is only around Rs 300 crore.

Investors were allowed to buy paper from banks or primary dealers earlier. But transactions were few and far between as most people had little knowledge of the going market price, and were always in danger of paying a premium for their ignorance. Now, since the RBI will determine the price for them in a primary auction, there is little chance of that happening.

Under this new system