Why bank fixed deposits make better sense than buying T-bills, G-secs

Retail investors have stayed away from G-secs due to lack of secondary market

In her Budget speech, the Finance Minister Nirmala Sitharaman said that the government wants to get retail investors to put money in treasury bills (T-bills) and government securities (G-secs). But the government has a long way to go to make them a preferred choice of instrument for retail investors.

The stock exchanges — BSE and the National Stock Exchange (NSE) — already allow small investors to participate in the Reserve Bank of India (RBI) securities auctions through their BSE Direct and NSE goBID, respectively. 

Unlike institutional investors, the central bank offers non-competitive bidding.  Under the scheme, investors can apply for a certain amount of securities in an auction without mentioning price/yield. The bidders are allotted securities at the weighted average price/yield of the auction. Any person with a trading account can apply for T-bills or G-secs on days when the RBI has an auction. The broker takes the order and gives it to the exchange, which, in turn, places the order with the RBI.

Stockbrokers say that lack of a secondary market is the biggest reason why retail investors have stayed away. “We saw some traction when the yields were better than bank fixed deposits (FDs), around three months back. As the yields have fallen now, there’s not much buying,” says Nithin Kamath, founder and chief executive officer, Zerodha.

According to the RBI website, the interest rate on 91-day T-bill is 5.98 per cent, on 182-day T-bill is 6.12 per cent, and 364-day T-bill is 6.13 per cent. The interest rate on the State Bank of India (SBI) FD is slightly higher. 

FDs between 46 days and 179 days fetch 6.25 per cent, between 180 days and 210 days is 6.35 per cent, and for 211 days and less than a year is 6.35 per cent. SBI offers an interest rate of 6.6 per cent on a 10-year FD, similar to a 10-year G-secs’ ongoing rate. The rates on post office small savings scheme are even higher.

The finance minister also said in her speech that the government will take necessary measures to ensure there’s interoperability between the depositories of the RBI and the Securities and Exchange Board of India (Sebi). But stockbrokers and bond dealers say there are problems when an individual wants to transfer G-secs between depositories of Sebi — National Securities Depository and Central Depository Services. The investor cannot transfer from one depository to another.

Trading G-secs is one of the key reasons why investors go for them. As rates fall, T-bills and G-secs can fetch better returns as their yields go up. But there is no secondary market for retail investors to trade in G-secs. If an investor buys a 10-year G-sec, he would need to hold it until maturity. “Even high net worth individuals find it tough to trade in the institutional market. The lot size there is Rs 5 crore,” says Vikram Dalal, managing director of Synergee Capital Services. 

Dalal says that he would instead advise investors to look at gilt funds where entry and exit are easier, and there’s tax benefit if they sell after three years. Dalal has a point. The gilt mutual fund category has returns of 14.11 per cent for a year and 5.8 per cent for three months.