The RBI Retail Direct Scheme was launched on 12th November, 2021. It provides a one-stop place for investment in Government Securities (G-Secs) by retail investors. This gives individual retail investors the opportunity to open Gilt Securities Account – “Retail Direct Gilt (RDG)” Account with the RBI.
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Scope of RBI Retail Direct Scheme
With the RBI retail direct scheme, retail investors will get access to trading government securities in the secondary market, which was not an option earlier. Previously, individual retail investors could only trade directly with the government in the primary market. Hence, normal investors now get a chance to invest directly in securities issued by the government. This will be possible through access to a portal called NDS-OM.
What is NDS-OM?
NNDS-OM stands for Negotiated Dealing System-Order Matching system. It is a screen based electronic anonymous order matching system for secondary trading in market for G-Sec owned by the RBI. Currently, NDS-OM portal is only accessible to banks, primary dealers, insurance companies, mutual funds, etc., which are entities who maintain SGL accounts with RBI. However, once retails investors open a Retail Direct Gilt (RDG) Account with the RBI, they will have access to NDS-OM as well.
Types of Securities
The Retail Direct Gilt account allows the investor to trade in the following assets:
- Treasury bills, which have a maturity period of under 365 days.
- Government securities, which can have a maturity period of anywhere between 1 to 40 years.
- State Development Loans (SDLs), which can have maturity period of up to 10 years.
- Sovereign Gold Bonds (SGBs), which can anyway be invested in without this account.
Advantages of RBI Retail Direct Scheme
- There is no credit risk in investing in any government issued bonds.
- Investment is possible for as low as Rs 10,000 and in multiples of it thereafter.
- Provides investors with the opportunity to trade in secondary markets if they do not wish to hold onto these securities any longer. However, access to secondary market will need to be requested for the account by opting for the option of NDS-OM.
- There are no account opening or maintenance charges applicable. Only a one-time application form needs to be submitted at the beginning.
As you consider investing in government securities through the RBI Retail Direct Scheme, it’s also important to plan your retirement comprehensively. Dr. Pattabiraman further offers expert advice on this topic in our blog ‘Jagruk Talks with Dr. Pattabiraman: How to Plan for Retirement.’ Here, you can find strategies to maximize your retirement savings and understand different investment avenues that can help secure your financial future.
Disadvantages of RBI Retail Direct Scheme
1. Low Interest Rates
The interest rates for RBI retail direct schemes vary from 4.56% to 7.10%. Moreover, the Yield to Maturity varies from 5.36% to 7.42%. These are quite low considering other government schemes such as PPF, EPF, SSY, EPS, etc., which have a higher interest rate than this RBI scheme. EPF interest rate is currently at 8.1%, PPF at 7.1% and SSY at 7.6%. Since all these options are government schemes at the end of the day, they are equally risk free too.
2. Terribly Taxable
Interest payment for government bonds may be half-yearly or annually, which is added to one’s income and taxed as per the tax slab rates. Additionally, if the bond was sold in secondary market before reaching maturity, then one has to pay capital gain on it.
Understanding the broader economic implications of government spending and investment can greatly benefit individual investors. Learn from Dr. Prasanna Tantri in our blog ‘Government Spending Explained: The Good, Bad & Ugly ft. Dr. Prasanna Tantri,’ which discusses how governmental policies affect the economy. This knowledge can help you make more informed decisions about investing in government securities and other related options.
On the other hand, schemes like EPF, PPF, SSY, etc., are tax exempt on their interest earned. Moreover, the principle paid for these these schemes are also deductible under tax.
Alternatively, one can invest in gilt funds. Gilt funds invest money in purchasing units of a mutual fund. The investment earned falls under capital gain and interest income. This also comes with the benefit of indexation.
If you’re considering diversifying your portfolio with bonds, understanding how to invest in them directly is crucial. Our blog ‘What are Bonds & How to Invest in Bonds Directly with Wint Wealth‘ provides a detailed guide on different types of bonds and how to invest in them, offering another perspective on managing your investments effectively. This guide complements the information on government securities, offering more options for your investment strategy.
3. Liquidity
While there is the option to sell G-Sec in secondary market, there may not be many buyers for it as currently the scheme is quite new. On the other hand, debt funds do not have this problem of liquidity, as long as there is not an overwhelming number of redemption requests.
4. Interest Rate Risk
The interest rate of newer bonds in the market may be higher than the one being held. Hence, it may be difficult to sell a lower interest rate bond in the market, if a better interest option is already out there. Predicting the interest rate of future bonds is difficult. Meanwhile, debt funds are held by experienced fund managers who are adept at predicting market volatility. They can take the decision of sell or buy themselves without owner’s intervention.
Who Should Invest in RBI Retail Direct Scheme?
- If one has already invested in other government schemes such as EPF, PPF, SSY, etc., upto Rs 1 lakh.
- Debt fund investment is already done or not an option.
- If one is looking for an income generating investment without compounding.
- One is looking for an investment option without a conservative lock-in period.
- There is no credit risk involved.
Watch more details on RBI retail direct scheme in the video below.
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FAQs
Any individual retail investor can participate in the RBI Retail Direct Scheme. This includes non-resident Indians (NRIs) who are eligible to invest in government securities under the Foreign Exchange Management Act (FEMA). The scheme allows these investors to open a Retail Direct Gilt (RDG) account with the RBI to buy and sell government securities.
Yes, the RBI Retail Direct Scheme is considered safe because the government securities (G-Secs) available through the scheme are backed by the Government of India. This means there is virtually no credit risk associated with these investments, making them one of the safest investment options available to retail investors.
Yes, retail investors can now directly invest in government securities through the RBI Retail Direct Scheme. The scheme provides a convenient platform for retail investors to access both the primary and secondary markets for government securities, which include Treasury Bills, Government Bonds, and State Development Loans.
The RBI Retail Direct Scheme is an initiative launched by the Reserve Bank of India (RBI) on November 12, 2021. It allows individual retail investors to open a Retail Direct Gilt (RDG) account with the RBI to buy and sell government securities directly. The scheme is designed to democratize access to government securities and provide a simple and secure way for retail investors to participate in the government bond market.
Yes, the RBI Retail Direct app is safe to use as it is an official platform provided by the Reserve Bank of India. The app is designed with multiple layers of security to protect user data and financial transactions, ensuring a secure environment for investors to manage their government securities investments.
Yes, opening and maintaining an account under the RBI Retail Direct Scheme is free. There are no charges for account opening, maintenance, or for any transactions made through the platform. This makes it an accessible and cost-effective option for retail investors looking to invest in government securities.
