Experts have doubts about bonds retail direct scheme
Taxation, locking in of funds for the long term and investor knowledge are areas of concern
{{^adFree}}
The retail direct scheme that allows individual investors to directly invest in sovereign debt papers was launched with much fanfare last week, but experts remain doubtful about its success.
{{^adFree}}
Some key areas of concern are taxation, locking in funds for the long-term, and overall investor knowledge and savviness on bond markets.
The scheme aims to bring more people into the bond markets, thereby widening the market borrowing opportunity for the government. Through a dedicated portal, retail investors can place non-competitive bids in the primary issuance of all central government securities, including treasury bills and sovereign gold bonds and securities issued by various state governments. They can also access the secondary market through the Reserve Bank of India’s (RBI’s) trading system.
{{^adFree}}
“Retail investors have severe limitations about entering the bond markets. First, it is a long-term investment and you are taking the risk of not being able to take advantage of interest rate changes in that period," said Madan Sabnavis, chief economist at Care Ratings. Moreover, Sabnavis said, such long-term government securities become virtually non-tradeable after the initial period and one would be stuck with it forever. That apart, small savings schemes are giving better returns and are just as safe.
“That apart, not many common investors understand the bond markets as it is not as straightforward as equities. At present, there are 90 existing government bonds and not more than 15 are being traded. While it is a good move to open it up and investors should have multiple means at their disposal, I doubt it will be of much interest," he said.
According to Kunal Sodhani, assistant vice-president (global trading centre) at Shinhan Bank India, the response to the product has been healthy, with more than 20,000 registrations already. However, he also pointed out some concerns on how the market liquidity will be. This, Sodhani said, happens with any new product and, as the market matures, it gets automatically taken care of.
{{^adFree}}
“Participants should understand there is no credit risk, but there remains an interest rate risk. Another area (of concern) remains in terms of taxation. While products such as small savings deposits, national savings certificates or public provident fund offer tax benefits, and mutual funds give indexation benefits that minimize tax payable, here the gains remain taxable, which may remain a challenge from the product perspective," Sodhani said.
Others pointed out that the government securities (G-sec) market is dominated by institutional investors such as banks, insurance companies, and mutual funds with lot sizes of `5 crore and higher. Hence, it was so far inaccessible to retail investors.
“Retail investors could thus far participate in G-secs only through debt mutual funds, though with limited options. Further, in debt funds, investors have to invest with a minimum three-year investment horizon through the growth option to qualify for long-term capital gains at 20% with indexation benefit," said Nitin Shanbhag, senior executive vice-president at Motilal Oswal Private Wealth.
{{^adFree}}
“Before they get in on the action, new investors must understand the workings of the bond market, such as the inverse relationship between interest rates and bond prices," said Adhil Shetty, chief executive of financial services marketplace BankBazaar.com.
Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!
{{^adFree}}
Catch all the Mutual Fund news and updates on Live Mint. Download The Mint News App to get Daily Market Updates & Live Business News.