So. In the Government Securities series, we have discussed Treasury Bills, Long-dated Government Bonds and State Development Loans. Earlier, we have also discussed Sovereign Gold Bonds (SGB) that come under G-Secs.
Now, the next question is, if you want to invest in any of these G-Secs, what is the best way to invest? Should you invest in the primary market or the secondary? And is it better to invest through your bank, broker, or RBI Retail Direct? Let’s discuss.
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Buckle up. Here we go!
Primary Market vs. Secondary Market: What’s the Difference?
Before we delve into the nitty-gritty of where to invest, let’s understand the primary and secondary markets.
Primary Market: Think of this as the bakery where G-Secs are freshly baked and sold to the public. In the primary market, you buy G-Secs directly from the RBI through auctions. This is where the securities are first issued to the market.
Secondary Market: This is like your neighbourhood grocery store. In the secondary market, you purchase G-Secs from other investors who have already bought them in the primary market. It’s like buying or selling stocks on a stock exchange.
Should you invest in the primary or second market?
When it comes to investing in G-Secs, our suggestion is to invest in the primary market. Because in bond investing, the primary market is more straightforward than the secondary market.
When investing in the primary market, the auctions are known beforehand. You can invest with just a minimum amount of ₹10,000. When you buy directly from the RBI, you don’t have to pay brokerage fees, which can be a significant cost savings over time. Even when you buy through banks or brokers, the transaction cost is low (0.06%).
When investing in the secondary market, you need more knowledge and clarity, because you have a broader range of G-Secs to choose from in the secondary market. But most of them don’t have enough liquidity. This fluctuates the prices of bonds constantly, and your yield changes, too.
Plus, when you trade in the secondary market, you may have to pay higher brokerage fees and commissions. These fees can eat into your returns over time.
Yes, some companies which provide a platform for secondary market transactions of bonds with good volume add their commissions before selling it to you.
Is there a third option?
Third option: Debt mutual funds and Exchange-Traded Funds (ETFs)
Yes, if you want to invest in G-Secs but prefer a hands-off approach, debt mutual funds and ETFs are your go-to. These funds pool money from various investors and invest in a diversified portfolio of G-Secs.
While they are professionally managed and provide good diversification, they come with expense ratios (management fees), and the returns depend on fund performance.
We will try to cover more about debt mutual funds and ETFs in future newsletters. Stay tuned. Subscribe if you haven’t yet.
Moving on. Let’s say you have decided to invest in G-Secs in the primary market. Which platform is the best option for to you invest in the auctions?
Which platform is the best to invest in G-Secs auction?
Well, as you know, the RBI conducts G-Secs auctions every week. You can invest in them through your banks or brokers (like Zerodha) or you can invest in G-Secs directly from the RBI through the RBI Retail Direct.
Investing in G-Secs through both banks and brokers is very convenient. You already have a DEMAT account with them (yeah, a DEMAT account is required to invest in G-Secs). Adding funds to your trading account is simple. And mostly, you can see all your investments in one place.
However, banks and brokers charge a transaction fee of 0.06% and 18% GST on the total amount of the transaction fee. That is ₹7.08 for every ₹10,000 you invest.
Whereas in RBI Retail Direct, you don’t have to pay any transaction fees. Also, you don’t have to pay any account opening or maintenance fees.
You see, the Retail Direct Scheme is a recent initiative by the RBI that allows individual investors like us to buy and hold G-Secs directly through an online portal. We can only invest in the four G-Secs through this account.
Also, this account gives us access to the NDS-OM Secondary Market platform, where we can sell our G-Secs before maturity if the need arises.
So, now the decision is yours. You can either invest through your existing accounts with your bank or broker. Or you can create a new account with RBI Retail Direct to invest in G-Secs.
Ultimately, your decision should align with your financial goals, risk tolerance, and the amount of effort you’re willing to put into managing your G-Sec investments.
Remember to share these insights with your buddies. Until next time!
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