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How RBI's Retail-Direct Scheme Can be Beneficial for Retail Investors

How RBI's Retail-Direct Scheme Can be Beneficial for Retail Investors

Mahasweta M.

Last Updated 06/09/21, 8:48 am

How RBI's Retail-Direct Scheme Can be Beneficial for Retail Investors

The Retail Direct Scheme is primarily focused on facilitating Indian residents to invest directly in government securities. Earlier, there were no ways in investing in g-Secs or T-bills by retail investors directly. Only institutional investors, stockbrokers, HNIs, banks, fund houses, etc., were allowed to participate in G-Secs or bonds.

Indian retail investors are going to have a fresh new debt instrument called the 'Retail Direct Investment' in their investment basket soon. In this scheme, small or retail investors will be able to invest directly in Government securities. On a press release during July 2021, RBI notified the RDI scheme publicly. However, the launch date of the scheme is still undisclosed. But we are expecting it will be launched during the end of 2021. The "Retail Direct Investment" is primarily focused on facilitating Indian residents to invest directly in government securities. In this article, let us talk about how the RDI scheme is beneficial for retail investors in India.

The Retail Direct Scheme

Retail Direct Scheme is nothing but a window to allow retail individuals to participate in the primary Government bond market using an Online Retail-Direct Gilt account managed by the Reserve Bank of India. Earlier, there were no ways in investing in g-Secs or T-bills by retail investors directly. Only institutional investors, stockbrokers, HNIs, banks, fund houses, etc., were allowed to participate in Government securities and bonds.

What is a Retail-Direct Gilt Account?

In order to participate in the primary Gilt market, an individual needs to open the Retail-Direct Gilt account. This account will facilitate the bidding and buying as well as selling securities. This means retail investors will have access to both primary and secondary Gilt markets from the single RDG account. The RDG (Retail-Direct Gilt) account is managed by the Reserve Bank of India. Investors can avail following securities from an RDG account so far:

GOI T-Bills (Short-Term instruments usually mature in 91, 182, or 934 days.)
GOI Dated Securities (Long-Term instruments, those mature between 5 to 40 years.)
Sovereign Gold Bonds (8 Years bond with fixed 2.5% annual return with the underline asset of 24 (995) karat gold)
State Development Loans (Bonds issued by states, usually for long-term investment)

Also Read: How to Invest or Buy Sovereign Gold Bonds (SGB) Online

Features of Retail Direct Gilt Account

The primary feature of an RDG account is to allow individual investors to invest in Government-issued debt instruments. As of now, no such direct route is available to invest directly in gilt instruments. All you can invest indirectly is through debt or gilt mutual funds. Let's discuss the basic features of the Retail Direct scheme:

Non-Competitive Bids

Individual investors are allowed to bid for securities or bonds on RDG online platform during the tranche. But here is the good thing is that, unlike institutional investors, retail individuals are not bound in bidding competition. That means, on bidding for a security, you are most likely to get the allotment.

Access to Secondary Market

When you buy bonds or securities directly from the issuer, you are likely buying from a primary market. In this case, when investors get their allotment of bonds through the bidding process from RBI, they are buying from the primary gilt market.

On the other hand, the secondary market allows existing bondholders to sell or purchase bonds or securities anytime. However, the price of bonds in the primary and secondary markets can be different due to demand and supply. The Retail-Direct Gilt account certainly offers both primary and secondary market features. Thus, buying-holding-selling will be easily possible with the help of a single platform.

Nomination Facility

Like other investments, retail investors can add up to two nominees with their Gilt account. In case of the death of the investor, the available securities will be returned to the registered nominees as per the ratio fixed by the investors.

Gift/ Transfer Of Securities

An RDG account holder will have the option of gifting securities to another RDG account holder.

Core Benefits of Having a Retail-Direct Gilt Account

Reduce Expense Cost: Investing in Gilt securities through mutual funds or broking platform carries some fees called Account Maintenance Charge (AMC). Charges can range from approximately .2 to 1.5% or more. This small recurring amount can have a high impact on the return on long-term investment. You can save this fee or commission by investing in G-Secs from your RDG account.
Zero Cost Account: According to the RBI notification, retail-direct gilt accounts do not carry maintenance charges or account opening charges. And also, no fees and charges are required by the aggregator for submitting bids in the primary auctions.
All-in-One Gilt Platform: RDG is an excellent platform where you can buy, hold, and sell Government securities. RBI Retail Direct provides facilities for accessing primary issuance of Government Securities. Also, access to NDS-OM or the Secondary Market.
Capital Security: Gilt Securities or Bonds issued by the Reserve Bank of India (RBI) on behalf of the Government. It may be state or central Government. These bonds carry sovereign security with almost zero default probability. Alternatively, it can be said that government bonds or securities are safer than fixed deposits of nationalized banks.
Good Alternative of Fixed Deposits: Bank FDs are still popular for most risk-averse investors. In terms of interest rate, Government-bonds can generate more return than regular bank FDs. Typically, a 5-Year bank FD is currently fetching a 4 to 5% interest rate. Whereas, long-term bonds still offering significantly higher interest rates. If I talk about capital security, investments in Bank instruments, whether FD, RD, or Savings accounts, are compositely insured up to Rs. 5 lakh for an individual. This means, in the worst-case scenario, your claim is limited to 5 lakh rupees from a single bank. On the contrary, your entire investment corpus under GSecs is safe and almost risk-free.

Also Read: 6 Fixed Deposits (FD) Alternatives Investments in India

Eligibility Criteria

An Indian retail investor/ individual is allowed to open an RDG account if he/ she has the following documents:

PAN (Permanent Account Number) Number
A Savings Bank Account Number
Any OVD (Officially Valid Document, Eg. UID, Voter ID, etc) for KYC purpose
A Valid Email ID
Mobile Number
Demat Account (Optional)

NRIs (Non-resident of India) are also allowed to invest in Govt. Securities under Foreign Exchange Management Act, 1999. A retail investor can open the account singly or jointly with another retail investor who meets the eligibility criteria.

Applying Procedure

Phase 1: Registration

Investors can register through an online portal by filling up the one-time registration form using OTP verification of registered mobile number and email id. Both primary and secondary market transactions on NDS-OM need an RDG account.

Phase 2: Primary Market Participation

For retail investors, there is no competition to participate and allotment of securities in the primary auction of government securities.
Retail investors can bid only one time. Then, on submission of the bid, the total amount payable will be displayed
Payment to the aggregator or receiving office can be made through any of the following:
- Through net banking or UPI facility from the linked bank account, can submit the bid on the portal.
- Using the UPI facility, the linked bank account can be blocked while submitting bids to the fund portal which will be debited from this account on a successful allotment in the auction.

Phase 3 (Optional): Secondary Market Transaction

In the secondary market, the registered investors can buy or sell the Govt. Securities through NDS-OM (odd lot segment/ RFQ) during trading hours.

Should You Consider Opening an RDG Account?

Well, RBI's Retail-Direct account carries multiple benefits. It is a very convenient way to invest in Gilt securities directly. The platform is almost free to use, and you are likely to pay zero fees, no transaction cost, no maintenance charges. Most importantly, you can buy and sell your holdings from one single account. So, the liquidity issue is certainly not going to happen.

If you invest in liquid or gilt mutual funds for the short to medium term, you can definitely try the Retail-Direct Scheme. Or, as I already said, you can choose this platform as an alternative to Bank Fixed Deposit. However, in terms of taxability, there is a negative aspect to the RDG scheme. Direct investment in G-Sec, the capital gain tax will be calculated based on the traded securities in a financial year. But in mutual funds, capital gains are calculated for the holding period of units.