The Reserve Bank of India’s (RBI’s) Retail Direct Gilt Account (RDG Account) opens a vista for retail investors to open an account directly with the central bank and access government securities (G-Secs) in retail lot sizes. While this scheme will open up for investors in some time, as and when the RBI announces the commencement, the choice of mutual funds, and within that Gilt funds, have been there with investors for a long time now. It is worth looking at how these two compare and which one is more suitable for you.
Accessibility: The advantage of an RDG Account is that the G-Sec market, which is currently wholesale or institutional because trading lot sizes are big, shall be brought within reach with affordable lot sizes, maybe as small as ₹10,000. In mutual fund schemes, the minimum investment amount is on the lower side. It may vary from one asset management company to another, but usually is ₹5,000.
Credit quality: G-Secs are the best credit quality debt securities available. Portfolios of Gilt funds comprise mostly G-Secs; sometimes there is a small cash component to meet redemption requests. This cash component is parked in a system called TREPS, which is run by the Clearing Corporation of India Ltd (CCIL). In this system, CCIL acts as counter-party for the trades and there is a collateral of G-Secs. Hence, this is safe and Gilt fund portfolios are as safe as investing in Gilts directly.
Liquidity: Liquidity in RDG Account is yet to be discovered. Secondary market transactions in G-Secs take place through a system hosted by CCIL called Negotiated Dealing System-Order Matching (NDS-OM). As mentioned earlier, traded lot sizes at NDS-OM are big as the participants are institutions such as banks and insurance companies. According to a notification issued by RBI on 12 July, investors who sign up for an RDG Account will have access to NDS-OM odd lot segment/RFQ (request for quotes). For RDG Accounts to be successful, liquidity is a key aspect and the RBI must have a plan to promote liquidity. Having said that, it is yet to be tested. In mutual funds, liquidity is proven; it is just a redemption request away.
Expenses: Your expenses at RDG Accounts will be minimal, or zero to nominal. If you go through a mutual fund, recurring expenses will be charged to cover costs of running the set-up. The extent of expenses are declared daily on the website of mutual funds, which you can easily check out. Expenses are relatively higher in the regular plan and relatively lower in the direct plan. In a direct plan of a mutual fund scheme, it is do-it-yourself (DIY) and you will not have the services of a mutual fund distributor.
Returns: Returns are a function of the market movement over your holding period for any investment such as equity, debt, gold or any other asset class. Having said that, in the context of comparison between RDG Accounts and Gilt mutual funds, one concept needs to be understood. That concept is hold-till-maturity (HTM). When you buy a bond, i.e. G-Sec or any other bond and hold till maturity, you get the return initially contracted. That is, at the time of maturity of the bond, the market level may be higher or lower than earlier, but that is not relevant. You get the maturity proceeds according to the terms, which is the face value. However, when you sell the bond prior to maturity, the price is subject to the market level at that time, which is referred to as mark-to-market (MTM). In an RDG Account, you can do HTM, provided you have the requisite investment horizon. In mutual funds, there are the usual Gilt funds that are open-ended and will always have a portfolio maturity, where you cannot do HTM. Nonetheless, there are Gilt funds positioned as maturity roll-down and there are target maturity funds with a defined maturity date where you can do HTM.
Taxation: In mutual funds, over a holding period of three years, there is significant tax efficiency by virtue of indexation benefit. In RDG Accounts, coupon (interest) on government bonds is always taxable at your marginal slab rate, which is usually 30% plus surcharge and cess. Net-net, RDG Account is for DIY investors with awareness of its availability and the operational aspects. Mutual funds offer G-Secs as a package, with liquidity, and come with running expenses attached. Options are increasing for the retail investor, you can take your pick.
Joydeep Sen is a corporate trainer (debt markets) and author.
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