Not satisfied with FD returns of top-tier banks? Consider G-Secs

Those keen on locking in interest rates for very long tenures should also opt for them

The Retail Direct Scheme of the Reserve Bank of India (RBI) has not evoked very enthusiastic response from retail customers so far. According to media reports, barely Rs 96 crore worth of government securities (G-Secs) have been purchased through this platform between November 2021 and April 2022.

Better returns than bank FDs

According to experts, however, retail investors should consider investing in G-Secs. “Since these securities are issued by the government, they are almost risk free,” says Joydeep Sen, corporate trainer (debt markets) and author.

Their returns have also turned fairly attractive. “The G-Sec maturing in 2026 is currently offering a 7.14 per cent yield. The 10-year G-Sec is offering 7.42 per cent. In comparison, the best return you can get from a top-tier bank such as the State Bank of India for a 5-10-year tenure is only 5.5 per cent (6.3 per cent for senior citizens),” says Sen.

G-Secs also provide the option to invest across a wide range of tenures. “Investors can choose tenures ranging from 91 days to 40 years,” says Udbhav Rajeshbhai Shah, investment advisor, iFast Global Markets.

Adds Deepesh Raghaw, founder, PersonalFinancePlan, a Securities and Exchange Board of India-registered investment advisor: “Investors can lock in interest rates for up to 40 years.” Tenures of bank fixed deposits don’t exceed 10 years.

Also, investors don’t have to pay any fee for buying or selling via the Retail Direct Gilt (RDG) account.

Consider investment horizon, tax bracket

• Those who wish to lock in interest rates for 20-40 years should consider G-Secs
• For a 15-year tenure (extendable in blocks of five years), consider Public Provident Fund, which offers 7.1 per cent tax-free return, and flexible withdrawal conditions after 15 years
• Investors in higher tax brackets may consider target maturity index or exchange-traded funds (investing in G-Secs, state development loans, and ‘AAA’ PSU bonds) or gilt funds as they offer better tax treatment if held for more than three years  
• RBI Floating Rate Savings Bonds (7.15 per cent return, taxable) and Senior Citizens Savings Schemes (7.4 per cent, taxable) are other alternatives that may be considered

Low liquidity

The chief downside of G-Secs is that liquidity tends to be low. “Odd-lot liquidity in the secondary market of the retail direct platform, while improving, is still low,” says Shah. Exiting these securities before maturity may not be easy.

A direct investment in G-Secs also doesn’t qualify for tax concession. Interest income gets taxed at slab rate. On the other hand, an investment in a gilt mutual fund qualifies for favourable tax treatment (20 per cent with indexation) once holding period exceeds three years.

G-Secs can fit into retirement portfolios
 

Interest rates are witnessing a secular downtrend. “In each successive decade, the high that is witnessed is lower than the high of the preceding decade,” says Shah.

According to him, investors keen to lock in interest rates for the very long term (above 20 years) may consider G-Secs. When doing so, they should stagger their investments. At present, after 10 years, the yield curve flattens. But this could change in a few months, or at least there will be greater clarity on this count, according to experts.

Investors who have clarity about their cash flow requirements may also invest in G-Secs. “Since there tends to be a question mark on liquidity, only investors who are certain that they will not need the money in the interim and can hold these securities till maturity, should invest,” says Sen. Holding till maturity will also negate the mark-to-market impact in a rising interest-rate scenario.

These bonds may also be considered by those who are in their 50s and wish to retire.

“At 50, the return from an immediate annuity plan tends to be low. So, consider investing in G-Secs that mature in 15-20 years and earn an income from them. Once these bonds have matured, consider an annuity. By that age, you will get much better rates from them,” says Raghaw.  

Pledging is an option

Investors who need the money midway through the tenure but find it hard to sell the bonds can consider pledging them. “You can get a loan against security from any bank by pledging G-Secs,” says Shah.

According to experts, the sweet spot on the G-Sec yield curve is five years currently. Once interest rates have peaked and are poised to fall, investors may want to earn capital gains by investing in longer-dated securities. They should avoid doing so through G-Secs, since exiting them quickly may prove difficult.