According to the recent announcement by RBI Governor Shaktikanta Das, retail investors can access government securities (g-sec) market online for investment along with the facility to open their gilt securities accounts. This decision translates into RBI’s attempt to encourage retail investment in the g-secs market.
G-secs have built a reputation of safety for people looking to invest in bonds due to negligible credit risk created via government backing. For instance, in the last three years, gilt mutual funds that invest in g-secs yielded 9.49 per cent returns.
Reasonable interest rates at minimum risk for g-secs have proved to be a better investment platform in comparison to Non-Convertible Debenture (NCDs) and Fixed Deposits (FDs). Therefore, they are generally preferred by investors willing to settle for low-medium yield with high security.
However, reading the fine print of Union Budget 2021 points otherwise.
Bonds work on a simple concept: If the interest rates are low, the bond price is high, and vice-versa. After a pandemic-hit economy, Budget 2021 allowed the government to borrow an additional Rs 80,000 crore from the market apart from the gross borrowing worth Rs 12.06 lakh crore. This replaces the expected ‘COVID cess’ and allows people to spend more and revive the economy. But, as a consequence of borrowing, ultimately, interest rates will rise, but the time span is unknown.
Furthermore, it has been observed that holding government bonds until maturity is the only way of reaping benefits. However, with the current market shift, interest rates in the interim time could swing in the upward direction, thereby decreasing the bond prices.
That said, at this time, investors may choose short term bonds funds instead of long-term g-sec funds for better profits and maintain a dynamic investment portfolio.