News APP

NewsApp (Free)

Read news as it happens
Download NewsApp

Available on  gplay  » Getahead » Right Time To Invest In Govt Bonds

Right Time To Invest In Govt Bonds

By Sarbajeet K Sen
November 04, 2022 15:24 IST
Get Rediff News in your Inbox:

Investors not comfortable investing directly may take the mutual fund route, where they get exposure to a diversified portfolio of bonds.

Illustration: Uttam Ghosh/

The Reserve Bank of India hiked the repo rate by 190 basis points this year, but banks have not revised their fixed deposit rates upwards by a similar amount.

The bond market, on the other hand, has responded faster to RBI rate hikes.

Currently, a one-year fixed deposit from the State Bank of India is offering 5.6 per cent.

364-day treasury bills (t-bills), on the other hand, are yielding around 6.9 per cent.

"At present, we have a unique investment opportunity where sovereign assets are yielding better returns than other conventional fixed-income investments," says Dhawal Dalal, chief investment officer-fixed income, Edelweiss Asset Management Company.

Credit risk free investments

Investors face no credit risk in these sovereign-backed instruments.

T-bills and G-Secs offer investors a wide range of tenors.

One can buy t-bills maturing in 90, 180 and 364 days or G-Secs and state development loans (SDLs) with tenors ranging between one year and 30 years.

T-bills are issued at a discount while G-Secs and SDLs pay interest twice a year.

"The relative attractiveness of G-Secs and SDLs has increased recently amid the hardening of yields and lower FD rates. Investors may prefer sovereign assets offering returns in excess of 7 per cent for three-year and above tenor for their long-term fixed-income allocation," says Edelweiss's Dalal.

Pankaj Pathak, fund manager-fixed income, Quantum AMC, agrees.

"At current levels, much of the expected rate hike and liquidity tightening is already priced into the bond market. Hence, this is an opportune time to move into government bonds," he says.

Use retail direct platform

RBI's retail direct platform allows retail investors to invest online in G-Secs.

The minimum investment amount required is Rs 10,000 (it can increase in multiples of Rs 1,000 thereafter).

"Retail investors can participate in RBI's auctions (generally every Friday) through the retail window started by the RBI. No brokerage has to be paid," says Vikram Dalal, managing director, Synergee Capital Services.

Invest in three-five-year papers

Investors must select G-Secs having the right maturity.

"A flatter yield curve provides less incentive for investors to increase the duration of their fixed-income portfolios. They should focus on the three-five-year segment of the G-Sec yield curve for their hold-to-maturity allocation," says Dhawal Dalal.

They can also ladder their investments.

"Invest 50 per cent of your corpus in shorter-duration bonds -- those with one-three-year maturity -- and ladder the balance 50 per cent across three-seven-year maturity," says Vikram Dalal.

Try the debt fund route

Investors face a couple of issues when they invest directly in G-Secs. Firstly, interest is taxable.

Also, the G-Sec market is not liquid. Investors may not be able to sell G-Secs at a fair price in the secondary market.

Investors not comfortable investing directly may take the mutual fund route, where they get exposure to a diversified portfolio of bonds.

Mutual funds are also taxed more favourably.

"After three years they are taxed at 20 per cent with indexation benefit," says Pathak.

Before three years, gains are deemed to be short-term and are taxed at marginal slab rate.

Target maturity funds (TMFs) are well positioned to take advantage of the high yields being offered by G-Secs.

They are open-ended schemes and hence offer interim liquidity.

They have a defined maturity and invest in high quality bonds, typically G-Secs, SDLs and PSU bonds.

If held till maturity, their returns become predictable: The portfolio yield to maturity (YTM) minus the scheme's expense ratio is the investor's net yield.

"Invest in this asset class through target maturity bond exchange-traded funds (ETFs) or index funds which invest in a combination of G-Secs and SDLs maturing in the 2026 to 2028 segment," says Dhawal Dalal.

"Invest in two to three tranches to average out your entry level."

Get Rediff News in your Inbox:
Sarbajeet K Sen
Source: source