BackRetail Direct: Experts say it's a welcome move if you understand duration risk
Vidya Bala, Co-founder of PrimeInvestor.in., said: This is a great shift for retail investors looking for safe optionsRadhika Gupta, MD and CEO, Edelweiss MF, says, opening G-Sec to retail is well-intended but investors need to know risks before they step in
PremiumIn a major structural reform, the Reserve Bank of India will soon allow retail investors open Gilt or G-Sec accounts with the central bank, a move that will help deepen bond markets in India.
RBI Governor Shaktikanta Das on Friday said: India will join a handful of countries where retail investors have direct access to government bonds - both primary and secondary.
The platform will be known as "Retail Direct".
RBI said in a statement: "As part of continuing efforts to increase retail participation in government securities and to improve ease of access, it has been decided to move beyond aggregator model and provide retail investors online access to the government securities market – both primary and secondary - along with the facility to open their gilt securities account (‘Retail Direct’) with the RBI."
It further said, "Encouraging retail participation in the Government securities market has been the focus area of the Government of India and the RBI. Accordingly, several initiatives viz. introduction of non-competitive bidding in primary auctions, permitting stock exchanges to act as aggregators/facilitators for retail investors and allowing odd-lot segment in the NDS-OM secondary market, have been taken in the past," the central bank said.
The Central bank will soon issue guidelines for this process.
Welcoming the move, Vidya Bala, co-founder of PrimeInvestor.in., said: This is a great shift for retail investors looking for safe options.
It will provide liquid guaranteed instruments for buy and hold retail investors who simply look for a guaranteed coupon, she further adds.
Echoing similar views, Radhika Gupta, MD and CEO, Edelweiss MF, says, opening G-Sec to retail is well-intended.
But adding a word of caution, Radhika says: but investors need to know risks before they step in. G-Secs carry duration risk (or interest rate risk), and retail enters after rates have fallen, because past returns look high. When rates reverse, this is painful.
Let's understand how.
Interest rates and bond prices share an inverse relationship. So, when the interest rates move up, the prices of existing bonds go down since they still offer the old interest rates.
So if a bond was issued at ₹1000 at 6%, and the interest rate of the economy goes up to 6.5% later, then its demand for the bond will go down and so will the price.
So Radhika concludes, target maturity structures are still better for retail investors because of the predictability of returns they offer.
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