RBI Retail Direct Scheme: Should you invest in G-Secs Directly?

Recently, the Reserve Bank of India has allowed retail investors like you and me, to directly invest in Government securities through an online portal- RBI Retail Direct. This scheme was announced by the RBI in February 2021 monetary policy. 

The G-sec market was more suitable for institutional investors like- mutual funds, banks, insurance companies, pension funds, and primary dealers. Due to the sheer size of the lots traded, it was not possible for retail investors to directly trade in these securities.

Retail investors used to take the exposure to Government securities indirectly through these institutional routes.

But now, investors can also buy/sell the Government Bonds by opening an online account directly with the RBI, in both primary and secondary markets. Sovereign Gold Bonds can also be purchased through this account.

In this post, let us understand how the RBI Retail Direct Gilt Account Scheme works and would it make sense to invest in G-Secs directly through this account?

What is RBI Retail Direct Gilt Account?

If you wish to invest in Government Securities, you can now directly open an online gilt securities account with the RBI. This is called RBI Retail Direct Gilt (RDG) Account. 

Through this account, you can buy the Government Securities in the primary market, i.e., directly from the RBI, when they are issued, and also from other investors at the prevailing market price, in the secondary market. 

Government securities like- Treasury Bills, Central Government Bonds, State Development Loans (SDLs), and Sovereign Gold Bonds can be purchased/sold using the RBI Retail Direct Gilt (RDG) Account. (Read a detailed post on Sovereign Gold Bonds)

Who can open RBI Retail Direct Account?

You are eligible to open an RDG account, if you have a savings bank account in India maintained in Rupees, A valid PAN, other valid documents for KYC purposes, like- Aadhar, Voter id, Driving License, etc, valid email address, and registered mobile number.

NRIs who are eligible to invest in Government securities under the FEMA Act can also open RBI Retail Direct Account. (Also Read: Who is an NRI?)

Every individual is allowed to open a single account only. This Account can also be opened in a joint name with another investor as well. However, the second holder in a joint account is also eligible to open an individual RDG account. (Also Read: Joint Account or Nomination- what is better?)

How to open an RBI Retail Direct Account?

The process of opening and operating the RBI Retail Direct Gilt Account is fairly simple and straightforward.

To open the Retail Direct Gilt Account, first, you need to register on the online portal. The portal can be accessed through- https://rbiretaildirect.org.in. Upon filling up the registration form with the relevant details like- Name, PAN, email, mobile, etc., you would receive OTPs on your email and mobile number for the authentication of the details. 

Now you can initiate the KYC verification process. If you are already C-KYC compliant, you need to provide your Date of Birth and PAN to retrieve your details. (Also Read: Why you should not ignore banks asking to re-submit KYC documents)

Next, you need to provide address details, bank account details by uploading the image of a cancelled cheque or by manual entry, scanned copy of your signatures, and nominee details. An OTP would be sent to you to authenticate the information on the mobile number registered with Aadhar.

If your current address is different from the one registered on the C-KYC portal, you need to upload the address proof as well.

In case, your database is not registered on the C-KYC portal, you need to opt for video KYC. For this, you need to download the XML version of your Aadhaar from the UIDAI website.

Once KYC is successful, the RDG Account would be opened in your name. In the case of joint accounts, the KYC details of both the holders would be required. You would receive an email with the account number, login id & password to access the RBI Retail Direct Online Portal.

Your Bank Account details would be verified by crediting a small token amount. The same would be linked to your RDG Account. Operating and maintaining this account is completely free of cost.

Buying and Selling G-Secs via the RDG Account:

Buying in the primary market:

Once your RBI Retail Direct Account is active, you can place bids for the non-competitive segment of the available Government securities. It means you only need to enter the desired amount of securities, without quoting the price. You need to select the security to bid from the ‘Auction Watch’ section and enter the bid amount in the ‘Bid Entry’ window. You can bid only once for every security.

Upon the bid submission, the portal would display the total amount to be paid to the aggregator, i.e., the Clearing Corporation of India (CCIL). You can pay through UPI/net banking, from the linked bank account or use the ASBA facility where funds would be blocked in the linked bank account and would be debited upon the successful allotment of securities (full/partial). 

Initially, an extra amount would be charged over and above the actual allotment price of the securities, which would be refunded within 2 business days from the date of auction. 

The allotted securities would be reflected in the credit of your RDG Account one day after the auction date and refund, if any, would be credited by the CCIL to the linked bank account in due course.

The minimum investment amount is Rs.10,000 and in multiples of 10,000 thereafter. The maximum being Rs. 2 crores for every security, every auction, in the case of Central Government Bonds. In the case of treasury bills, the maximum amount is restricted to 5% of the issue amount and in the case of SDLs, it is 1% of the notified amount, i.e., face value per auction. 

There is no fee charged by the RBI for this bidding. Only the payment gateway charges would be applicable.

Buying and selling in the secondary market:

You can access the NDS-OM secondary market portal through the RBI Retail Direct online portal that can be used for buying and selling G-secs in the secondary market.

For buying securities through this portal, you need to transfer funds to the designated account of CCIL through UPI or ASBA mode. Upon successful receipt of funds, you would be provided with the Buying Limits, to place buy orders. Settlement criteria would be similar to that of the primary markets.

Similarly, if you wish to sell any security, the same would be blocked at the time of placing the sell order, till the trade settlement. On the day of settlement, funds realized from the transaction would be credited to your linked bank account.

Some other features of RBI Retail Direct Account:

• You can view your account statement online through the portal. It would show the transaction history and the balance position of the securities in your RBI Retail Direct Gilt Account.

• Each RDG Account can have a maximum of two nominees. Upon death of the registered investor, the securities would be transferred to RDG Account or any other Government securities account of the nominee, upon submission of death certificate and transmission form. (Also Read: How to make use of nominations for comfortable wealth distribution)

• Securities held in the RDG account are available for pledge/lien. You can take a loan in lieu of these securities.

• You have the facility of gifting these securities to your friends and family (who fulfills the eligibility criteria), online through the Retail Direct portal. The bonds can be transferred to his/her name as per the Government Securities Regulations.

• You can also raise a query/grievance related to the RBI Retail Direct Scheme on the portal. It will be handled/resolved by the Public Debt Office (PDO) Mumbai, RBI.

Should you open an RBI Retail Direct Gilt Account?

Although through the RBI Retail Direct Bond Scheme, the Government provides the individual investors with the opportunity to directly invest in Government Bonds, we do not see many advantages of it from the investor’s point of view.

The indirect route to invest in G-secs, through Debt Mutual funds has many advantages. Firstly, you need not worry about the macro-economic factors that affect the prices of the g-secs and managing the risks associated with them. Expert management would take care of these aspects.

Yes, it’s true. Government securities are also not a completely risk-free investment. Although g-secs carry nil credit risk, the interest-rate risk component is much higher. These are highly sensitive to interest rate movements in the economy. They become very much volatile, especially in the rising interest-rate scenario. (Also Read: Types of risks in investments & how to manage them)

Also, the liquidity risk is high in secondary markets, especially for smaller amounts. You may not find a buyer when you want to sell your bond if invested directly. You need not worry about liquidity aspects if invested through mutual funds. You can redeem your investment as per your wish.

From the taxation perspective too, the direct purchase of the Government securities through the RBI Retail Direct Gilt Account leaves you at a disadvantage especially if you are in the higher tax slabs. (Also Read: whether to go for new or old income tax slabs?)

The interest you receive on the Government Bond would be added to your income, every year and would be taxed as per your income-tax slab rates. On the other hand, if you invest in gilts through mutual funds, the interest accrues on the fund.

You would be taxed only when you redeem the units, that too at the capital gains tax rate of 20%, after indexation benefit. That way, the effective tax rate becomes way less, increasing your post-tax yield of the investment. (Also Read: How Indexation helps in saving capital gains tax)

So, you can consider investing directly investing in Government bonds through the RBI Retail Direct Gilt Account, only if you are buying the bond for holding it till maturity. That way, the interest rate risk can also be minimized and liquidity risks are eliminated too. But, here taxation aspect needs to be taken care of by investing in the name of any family member with little or no income.

Else, the efficient alternative would be to go for Target Maturity Funds. These are passive debt funds that invest in Government securities, following a ‘buy and hold’ strategy. These funds would provide you with the same experience along with added benefits including- diversified portfolio, better liquidity, tax efficiency, etc. (Read a detailed post on Target Maturity Funds)

Yes, all these benefits come with a cost. You need to pay the expense ratio of the fund, which is also quite low in these funds due to the absence of active management. If we do a cost-benefit analysis, surely this option would be a suitable alternative. (Also Read: Expense Ratio in Mutual Funds)