Navigating the world of financial investments can often feel like you’re walking through a maze. For Non-Resident Indians (NRIs), this challenge gets amplified given the distinct rules and regulations that apply to their investment opportunities in India.
One such lucrative avenue is the domain of Government Securities, colloquially known as G-secs and Treasury Bills. Let’s take a deeper dive into this.
In this article...
What are G-secs and Treasury Bills?
Government Securities (G-secs) are instruments issued by the government to raise money from the public. They’re essentially debt obligations, promising the investor a fixed return at a specified time.
Treasury Bills, a subset of G-secs, have a shorter maturity period, typically less than one year. Both of these instruments are considered among the safest investment avenues since they are backed by the government itself.
Why Should NRIs Consider Investing in G-secs?
- Safety First:
As they are sovereign-backed securities, the risks associated with G-secs and Treasury Bills are minimal. They offer a guaranteed return, making them a prime choice for risk-averse investors. - Steady Returns:
Though the returns might not be as high as equities, they are consistent, providing a reliable income stream. - Diverse Maturity Profiles:
From short-term Treasury Bills to long-term bonds, G-secs offer a range of maturities. This allows NRIs to invest based on their financial goals and timelines. - Liquidity:
Given their established market, G-secs can be easily traded, ensuring liquidity for the investor.
How Can NRIs Invest in G-secs?
The process, which used to be complex, has now been streamlined:
- Open an NRE or NRO Account:
NRIs must have an NRE (Non-Residential External) or NRO (Non-Residential Ordinary) account with an Indian bank. These accounts allow them to hold and manage their income earned outside India. - Approach an RBI-approved Dealer:
Investment in G-secs requires intermediation by banks and primary dealers approved by the Reserve Bank of India (RBI). - Participate in Auctions:
NRIs can participate in the auctions conducted by RBI using funds from their NRE/NRO accounts. These auctions are typically transparent and straightforward. - Use the ‘Non-Competitive Bidding’ Facility:
This facility allows NRIs to submit bids without specifying the yield, making the process easier and ensuring allotment.
Certainly! Let’s delve into these two sections:
Features of Yield-based and Price-based Auction
Yield-based Auction
When an investor participates in a yield-based auction, they bid in terms of yield, i.e., the annualized rate of return they expect from the security.
- Determination of Price: In this type of auction, the price is determined after the auction based on the bids received. The bids provide the desired yield, and the price is computed from that.
- Common for New Issues: Typically, yield-based auctions are more common for new security issues.
- Yield Bids: Investors bid by mentioning the yield (interest rate) at which they are willing to purchase the security. The yield should be quoted in two decimal places.
- Cut-off Yield: Securities will be issued at the highest yield bid (cut-off yield). Those who bid lower yields will receive allocations at their bid yields.
Price-based Auction
In a price-based auction, bidders specify the price at which they are willing to purchase the security, instead of the yield.
- Quoted Price: Investors mention the price they are willing to pay for the security. This quoted price should be per ₹100 of the face value.
- Common for Re-issues: Price-based auctions are usually held for securities that are re-issued.
- Cut-off Price: Here, the cut-off is based on price. Those bidding above the cut-off price get the allocation, and all successful bidders pay the same price regardless of their bid price.
- Inverse Relationship with Yield: Price and yield have an inverse relationship. As price rises, yield falls and vice-versa.
Benefits of Investing in G-Secs in India
1. Capital Protection: Being sovereign-backed, G-Secs guarantee the principal investment amount, ensuring that the capital remains protected.
2. Predictable Returns: G-Secs offer a fixed interest rate, ensuring that investors receive a predetermined interest at regular intervals, providing a predictable income stream.
3. Diversification: G-Secs can act as a great diversification tool for investors who primarily have equities or other assets in their portfolio. They tend to have a low correlation with riskier assets, ensuring stability during volatile market phases.
4. Liquidity: G-Secs have an active secondary market, which means investors can easily sell them before maturity if they need funds.
5. No Default Risk: Given that they are backed by the government, the risk of default is negligible, making them one of the safest investment avenues.
6. Inflation Protection: Some G-Secs, like Inflation-Indexed Bonds (IIBs), offer protection against inflation, ensuring that the investor’s purchasing power doesn’t erode over time.
7. Range of Maturities: G-Secs come in various maturities, from short-term Treasury Bills to long-term bonds, giving investors ample choice to match their investment horizon.
8. Accessibility: With the digital revolution and platforms like the Reserve Bank’s ‘Retail Direct’ portal, even individual retail investors can now easily invest in G-Secs, making them more accessible than ever.
Things to Keep in Mind
- Taxation: The interest earned on G-secs is subject to tax as per the Indian Income Tax Act. However, the principal amount, when redeemed, is exempt.
- No Repatriation: Earlier, the principal and interest amounts were non-repatriable. However, with recent changes, NRIs can now repatriate interest amounts, though conditions apply.
- Limit on Investment: The RBI has set a limit on NRI investment in G-secs. As of the last update, this cap was 6% of the total volume of government securities.
- Duration: Given their nature, G-secs are ideal for those looking at mid to long-term investment horizons.
FAQs:
Are G-secs better than bank fixed deposits for NRIs?
While G-secs are safer due to government backing, the returns might be slightly lower than FDs. It’s essential to weigh the safety vs. return aspect based on personal preferences.
Can NRIs sell G-secs before maturity?
Yes, NRIs can sell G-secs in the secondary market. However, the sale proceeds will have to be credited to the NRO account.
Is there any risk of default in G-secs?
Being government-backed, the risk of default is almost non-existent.
Can I invest in G-secs through mutual funds?
Yes, many mutual funds invest predominantly in G-secs. NRIs can consider investing in such funds after evaluating their goals and risk appetite.
To conclude, G-secs and Treasury Bills offer a balanced mix of safety and steady returns, making them an attractive investment option for NRIs.
As with all investments, it’s prudent to do your research and, if needed, consult a financial advisor to align your investments with your goals.
