In a bid to make government securities popular among retail investors, RBI has allowed retail investors having demat account to invest and trade directly in government securities or gilt securities from August 16.
“It has been decided to allow demat account holders of NSDL and CDSL to put through trades in government securities on the Negotiated Dealing System – Order Matching (NDS-OM) platform through their respective Depository Participant (DP) bank which is an SGL Account Holder and a direct member of NDS-OM and CCIL,” states the RBI circular.
So far, retail investors were not allowed invest in gilt securities directly. They have been investing in gilt through institutional investors like insurance companies, asset management companies and banks.
Cafemutual spoke to a few fund managers and advisers to understand whether this move will make retail investors rush to gilt funds and whether they should invest in gilt securities directly.
Dwijendra Srivastava, CIO - Debt, Sundaram MF believes that retail investors will have to do a lot of research to invest in gilt securities directly. “The idea behind allowing retail investors to trade in gilt securities is to create a level playing field. However, before investing in gilt securities, retail investors should look at the intrinsic value and quality of the security. Fixed income is very complicated compared to equity. If you have paid high price to buy a gilt, the chances of getting capital appreciation is negligible. Also, the minimum ticket size of investing in gilt securities is Rs. 10,000. In mutual fund, one can start investing by as little as Rs.500. Also, investors get the services of professional fund managers at a very low cost.”
R Siva Kumar, Head - Fixed Income, Axis MF believes that gilt funds have an edge over direct gilt securities in terms of tax benefits. “Investors cannot avail indexation benefits if they invest in gilt securities directly. However, investors can save a lot on tax by investing through mutual funds.”
“Though sovereign papers do not expose investors to credit risk, gilt funds carry high degree of interest rate risk. Hence, at end of the day, investing in gilt funds is about timing the interest rate movement. Gilt securities is not for accrual. People invest in gilt for capital appreciation and hence entry and exit is the key here. Retail investors may not have the acumen to understand this. And hence, they are better off leaving it to professionals like fund managers,” says Vidya Bala, Head – Mutual Fund Research, FundsIndia.com.
An ideal time to invest in these funds is when interest rates are expected to fall, because there is an inverse relationship between the price of the G-Sec and interest rates. A fall in the interest rate leads to a rise in the bond prices as well as the NAV of the gilt fund and vice-versa. Also, longer the duration of the securities/portfolio higher will be the capital appreciation and vice-versa.
