All About RBI's (Reserve Bank of India) Direct Retail Scheme

 

All About   RBI's (Reserve Bank of India)  Direct Retail Scheme

 

Until now the government security ( g-sec)  market was dominated by institutional investors such as banks, mutual fund houses, and insurance companies. These entities trade in lot sizes of Rs 5 crore or more. In order to make access to ordinary retail investors, recently govt launched   The RBI Retail Direct Scheme .

 The RBI Retail Direct Scheme is a facility or  platform for small individual investors to invest (buy /sell) in the Govt.security scheme directly  that facilitates retail (individual)  investors to purchase and sell government securities (G-sec) on the primary and secondary markets over the internet. It provides ordinary investors with a new way to invest directly in securities issued by the Central  and state governments

These small investors can now invest in G-Secs by creating a gilt security account with the RBI,. The new account will be known as the Retail Direct Gilt (RDG) Account.

Before we try to know full details about the Scheme, we should first know what is Govt. Securities and is it beneficial for you to buy it.

What is G-Sec. (Govt Securities)

When Govt expenditure exceeds its revenues, the government issues securities, popularly known as G-secs or government bonds to raise funds, which is utilised to cover the deficit.

These are debt instruments issued by the Central or State government to borrow money from market and usually carry Fixed Interest Rate that you get on maturity.

 

These are of two types  , short or Long term

Short terms :

which mature in 91 days, 182 days, or 364 days, and

Long Terms

which mature anywhere between 5 years and 40 years.

 

Examples of Govt Securities are :

 

Treasury Bill (T-Bill) , Bonds etc.

 

Treasury Bills are short terms while bonds are of long terms

Should you buy :

Most people while taking investment decision would think about equities (co. share) , Bank fixed deposits, mutual funds, real estate (land, house, flat)  or gold Very few consider investing in government securities or bonds. However, investing in government bonds can be an effective way of diversifying your investments and reducing risk.

the government pays a fixed interest rate on the bonds and by remaining invested in government bonds until maturity, you can derive maximum yield. One can also consider investing in government bonds to diversify his/her portfolio as these are largely stable and perform well when other asset classes are under pressure.

Interest rates in different Govt Securities are usually 6 to 12%  depending on tenures.

Returns on these bonds are not affected by ups and downs in capital market , however there are some credit risk in investment , if Govt reduces interest rate then some risk is there in pre mature withdrawal , if you remain invested till maturity , there is very less chance of risk

 Such bonds are guaranteed by Govt so it is super secure.

 Disvantages

Interest rate is usually low , between 6 to 12% .  Higher Interest rate is only when tenure of Govt Securities is high like 10 to 20 years.

And such low rate of interest usually does not justify inflation ( loss in purchasing power of Money

For example a 8% 7 years govt security/bond of Rs. 10000 will Guaranteed return you Rs. 10800  after 7 years . Consider Value of Rs. 10800 after 7 years???

So the investment kin Govt Securities  is good for Conservative investors who do want to take any risk at all

Taxation Effect :

Return is Taxable when received unless mentioned as Tax free. So post Tax return will be less than 8%

What should you do ;

If you want to diversify your portfolio with no risk investment , you can invest in Govt Securities

There are Two ways to Invest in Govt Securities :

 

1.     Via Mutual Fund ,

 

 Specially named as Govt Securities Fund or Guilt Fund, Such as  Aditya Birla sunlife Govt Security Fund, DSP G-sec Fund, ICICI Govt Security Fund, SBI Bond funds etc. These mutual funds primary invest in Govt Securities and bonds and are less risky , less volatile (and consequently gives less returns)

 

2. Via  RBI Retail Direct Scheme .

 

        If you do not want to invest in Govt Securities through Mutual Funds , You can now Directly buy from RBI’s web site. RBI has recently launched  a scheme called Retail Direct scheme for Individual Investors to buy Govt Security. For this you have to undergo following process :

 

1. Visit RBI web site rbiretaildirect.org.in/
   
   
2.  Register yourself & open an account . The new account will be known as the Retail Direct Gilt (RDG) Account.
   
   
3. After opening your account there you can buy or sell  Govt securities and Bonds
4. Detail process is given on that site rbiretaildirect.org.in/

 

Benefit of Direct Investment

 

There is no Fee attached , No expenses are charged by RBI . Rates may be Low then secondary market like Mutual Fund.

 

Conclusion :

 If you do not want hassles of  investing through RBI Retail Direct Scheme , you can invest through Guilt Funds – which invest primary in Govt Securities only.

 

Some Popular Guilt Funds are :

 

SBI Guilt Funds , ICICI Guilt Funds, Aditya Birla Govt Security Funds , DSP Guilt funds etc.

All these guilt funds have given around 8 to 9% returns consistently and not much effected by Volatility of Market .