Reserve Bank of India recently launched the RBI Direct Scheme. As per the scheme, retail investors will now be able to buy & sell G-sec (government securities) & Bonds directly through the RBI Retail Direct Portal. The scheme is considered a significant milestone in government securities development. RBI Direct scheme will simplify the process of investment for the common man. It will bring the G- Sec (securities) & bonds within the reach of the common man. G-sec refers to the financial instruments via which the government of the country borrows money to support its financial requirements.
This scheme will facilitate the opening of an RDG (Retail Direct Guilt) account with RBI (Reserve Bank of India) to participate in the buying & selling of securities & bonds. An individual can open an account by using the online portal. An investor can use the following routes to purchase the bonds:
- Primary Issuance of government securities
- Secondary Market
In a primary issuance, investors can place a bid to participate in the primary auction of G-sec & procedural guidelines for SGB issuance as per the non-competitive scheme.
In the secondary market, investors can buy & sell government securities via NDS-OM (NDS-OM i.e. Negotiated dealing system Order Matching refers to a screen-based electronic device for matching the orders in the secondary market trading). The system is owned by RBI itself.
Investors can make payments using their savings bank account with the help of internet banking or they can also use a unified payments interface (UPI). The portal will assist the investors with all the help they require.
Following are the services provided to the investors via this portal
▪ Provision for the transactions along with balance statements.
▪ Nomination facility
▪ Gift transactions
▪ Pledge or lien of government securities
In RBI Direct Scheme, there will be no fees charged to the investors for all the facilities provided under the scheme. The scheme aims to provide a simple, transparent, safe, and secured platform to its investors. Before this, there was no demand for government securities due to procedural issues, low liquidity in the secondary market, and also lack of awareness. The G-sec market was entirely dominated by institutional investors such as mutual funds, insurance companies, and others.
RBI direct Scheme will help the retail investor to participate in government securities & bonds.
In this article, we have covered the list of securities that can be bought via the portal. Along with benefits & limitations, also, the process to participate in these securities.
Below is the list of government securities that an investor can deal directly with the help of the RBI Direct Scheme.
- State Development Loans (SDLs) – SDLs refers to the long-term debt instruments which are issued by the state government in the country. It is borrowed for a minimum of one year. The state government cannot issue Treasury bills, therefore they issue bonds that will mature after a year at least.
- Government of India Treasury Bills (T-Bills) – T-Bills or also known as Treasury bills refer to the short-term debt instruments which are issued by GOI (government of India). The government borrows money with the help of bills for a short period. Currently, the government issues these bills for a period of 91, 182 & 364 days respectively.
- Sovereign Bonds– These bonds refer to the government securities which are denominated in grams of gold. It ideally serves as a substitute for holding physical gold.
- Government of India securities Dates securities (Government Bonds or Dated G-sec) – As the name implies these are bonds that are issued by the Indian government. With the help of these bonds, the government borrows money for a minimum of one year atheist.
The RBI Direct Scheme has many benefits as it will directly deal with the investor without an intermediary. Enlisted below are a few of them:
- Safe Investment via Treasury bills – Treasury bills are considered as one of the safe investments in India since they are issued by the central government. An investor will always be able to measure his/her returns as the yield is predetermined. It serves as a short-term tool to borrow money from the government of India.
Treasury bills refer to promissory notes with a guaranteed payment at the time of maturity. It is issued at a discounted price to the original price. The investor is entitled to receive the original value upon maturity. The difference between the two is the profit of the investor. It is ideally zero-coupon security that pays no interest. Hence, the Treasury bill is one of the best options for investors who are looking to park their funds for a short period with no risk.
- Affordability – The minimum amount that is required for investment through RBI direct retail platform is different for all the securities. For instance, the minimum amount required to purchase government bonds or SDLs (State government bonds) is RS 10,000/- Whereas, the minimum amount of investment for SGB (Sovereign gold bonds) is the current price of one gram of gold. As the price of gold keeps fluctuating, the price of SGB is also dynamic. Therefore, the government securities offer affordable investment options along with no default risk.
- Frequency of SGBs – The Sovereign gold bonds are generally issued within a short period of interval. The period ranges from 2-3 months. If you are not able to invest due to any reason you can also purchase it from the secondary market. To invest in the bonds via the secondary market you will need to have a Demat account, which will add cost. But, with the help of the RBI Retail Direct Scheme investors can purchase the bonds in the secondary market without having a Demat account.
- Low Cost – Earlier individual (retail) investors couldn’t invest directly in government bonds. They had to route the funds in government securities with the help of brokers. These brokers use to charge fees for the same. Even the investment in mutual funds investors bears the expense ratio. Now, with the help of the RBI retail direct scheme, you can invest directly without any involvement of an intermediary. Hence, the investment in government securities is free of any charge.
RBI Retail Direct Scheme has numerous benefits for its investors. It has a few limitations as well, such as follows:
- No exemption from tax– A government bond pays interest either annually or semi-annually. The interest received on bonds is fully taxable as per the income tax slab rate. For example, if you earn an interest rate of 7% on the government bonds and fall in 30% of the income tax bracket. The post-tax returns will then reduce to 4.67% approximately. The absence of tax incentives reduces the net return.
On the contrary, if you invest in government securities through a debt mutual fund there is a way you can minimize the tax. In Debt Mutual Funds, your return is taxed only when you redeem. As per income tax rules if a Debt Mutual Fund is redeemed after 3 years it is taxed at 20% with indexation (Indexation is a process of adjusting the purchase price of an asset to account for the increasing inflation between the time of purchase and sale. However, if you redeem it before 3 years you won’t be enjoying any tax benefit.
- No Easy Exit to Your Investment– Since the platform is recently launched awareness among retail investors is very low. The liquidity also remains low i.e. the ability of the investor to sell the securities. In case you want to liquidate your bond before its maturity, you will not be able to find a customer. This will result in a distressed sale i.e. selling the security at a lower price than its holding cost and ultimately leading to loss. Even if the buyer has become easy, selling the security is still a matter of concern.
To participate in the RBI direct scheme an investor will have to open an RDG (Retail Direct Guilt)
Details required by an Investor to open an RDG (Retail Direct Guilt) account are as follows
An individual can log in to the official website of RBI (Reserve Bank of India) by visiting https://rbiretaildirect.org.in to open an RDG account. As per the website the individual will have to submit the following mentioned documents to facilitate the process of opening the account.
⮚ Individual’s PAN (Permanent account number)
⮚ Email Address
⮚ Mobile number
⮚ Bank account information
To complete the registration process for registering under the scheme, the individual will have to provide the above-mentioned details and also complete an online KYC (Know your customer) process.
How to register online for the Reserve Bank of India Direct Scheme?
You need to follow a few steps mentioned below to register for the Direct Gilt Account
Step 1: Go to the official website of RBI i.e. https://www.rbiretaildirect.org.in and select the tab “Open RBI Retail Direct Account”
Step 2: Then, Fill in all the details required to create an account. Details such as Name, Pan, and Birthday would be required. If you wish to open a joint account, then select “Joint Account” or else a single account.
Step 3: You need to verify your mobile number and email address. For this, you will receive an OTP (one-time password) to complete the verification process. You would also need to enter your preferred login name.
Step 4: The page has an option to preview the content and double-check the information before you submit it. Therefore make sure once you fill in the details you cross-check the information again.
Step 5: To begin the Know your customer procedure you will have to select the “Initiate KYC” The page has two alternative options for KYC as mentioned below:
⮚ CKYC (Central Know your customer)
⮚ Offline KYC
Offline KYC is required if the investor is not compliant with KYC or the Central knows your customer does not have information about the individual/ investor.
Step 6: Using your Permanent account number you can search the information. If the investor PAN number is not available in the CKYC database, then an Error message will appear which read as “Failed to search CKYC Number Please Try Again Later”
To go back to the previous page and select the pick offline option KYC, the individual needs to click the “Round Arrow Button” which you can find out on the top left corner.
Please Note – To adhere to the CKYC compliant instances, the individual must select the Date of Birth/ Digital Object Identifier as the Authentication Key and enter the investor’s date of birth. Select the CKYC details.
Step 7: You can click the Submit option to review the CKYC information on the screen.
Note – If the screen displays “CKYC Non-compliant” the individual will then have to upload a copy of the pan card and also his/her Aadhaar card XML UIDAI (Unique Identification Authority of India) website.
Step 8: A customer will have to make a declaration under FATCA (Foreign Account Tax Compliance Act) and PMLA (Prevention of Money Laundering Act) by filling in additional personal details.
Step 9: The investor will have to confirm his/her address.
Step 10: Then, you will have to choose the bank and upload a copy of the blank cheque. If you don’t have a copy of the cheque, you can skip the page and fill in all the required details manually.
Step 11: A random sum of money is credited to the individual (investor) account, which the individual will need to input to complete the bank verification process. You will need to fill out the nominee form once the verification is complete.
Step 12: After completion of nominee details the individual will be directed to the Application page i.e., summary page, where the investor will have to select the submit button to finish the KYC & registration process.
After completing all the steps, you can review the terms and conditions along with the signee’s name. Once the investor validates his/her details the application is considered to be filed. The investor will then receive a letter with instructions on how Aadhaar enabled OTP will help him/her to sign the terms and conditions digitally.
If the investor had opted for the offline KYC (Know your customer) process he or she needs to finish the Video KYC procedure. During the process, the investor will have to furnish the original PAN card to the authority.
The investor can call the RBI helpline on 2677955 or can also email at firstname.lastname@example.org for further queries or clarifications.
If you are a risk-averse investor looking for short-term goals then investing in Treasury bills for a period of one to 3 years is a good option. Government securities are considered as one of the safest options to invest if you hold them till maturity. Always remember if you redeem the government securities & bonds before 3 years then you will have to face tax implications as Debt Mutual Funds.
Post-tax returns need to be considered if you are planning to invest in G-sec for a longer period. If you don’t intend to hold these securities & bonds till maturity you will also have to consider the interest risk. Remember when interest rates go up, bond prices go down & vice versa.
Looking forward to investing in the RBI Direct Scheme or any other competitive investment scheme? Starting to invest is always a good idea, but it is always recommended to understand all the pros and cons of the scheme along with comparing it with your long-term financial objectives. No matter where you invest, your investment should always be aligned with your financial goals.
Above all, though you can always invest as per your knowledge, it is recommended to consult a certified financial advisor to make an even wiser and a confident decision.
A financial planning platform where you can plan all your goals, cash flows, expenses management, etc., which provides you advisory on the go. Unbiased and with uttermost data security, create your Financial Planning without any cost on: http://bit.ly/Robo-Fintoo
Disclaimer: The views shared in blogs are based on personal opinion and does not endorse the company’s views. Investment is a subject matter of solicitation and one should consult a Financial Adviser before making any investment using the app. Making an investment using the app is the sole decision of the investor and the company or any of its communication cannot be held responsible for it.