In November 2021, the Reserve Bank of India (RBI) and the Central Bank of India introduced the Retail Direct Scheme. What is this RBI Retail Direct Scheme and how can an individual invest in Government Securities through this scheme, let’s discuss this all in this article as we move ahead.
What is RBI Retail Direct Scheme?
- RBI Retail Direct Scheme which was introduced by the Central Banks of India- Reserve Bank of India (RBI) in November 2021.
- It is a One-Stop Solution for all individual/retail investors to invest in government securities directly.
- Earlier this privilege was only with the Institutional Investors.
- Before the introduction of this scheme, a retail investor needs to select the path of mutual funds to purchase government bonds. But now under this scheme, a retail investor can purchase government bonds via the Retail Direct Scheme of RBI, available on the RBI’s website.
- This scheme is similar to the equity market, as now one can trade these bonds wherein one can purchase the bonds at the time of issue and can trade in secondary markets.
Why RBI Retail Direct Scheme was Needed?
- To ease out and provide a direct reach of bonds to the retail investors.
- To strengthen and promote the debt market
- For financing purposes of the Government.
Which Securities You Can Transact?
- Under this scheme, an investor can invest in 4 types of Government Securities:
- Government Securities
- State Development Loans
- Government Treasury Bills
- Sovereign Gold Bond
- Government Securities (G-Sec): Dated G-Sec are securities that carry a fixed or floating coupon (interest rate) which is paid on the face value, on a half-yearly basis. Generally, the tenor of dated securities ranges from 5 years to 40 years. To start with, one needs an investment of Rs. 10,000.
- State Development Loans: Just Like Dated G-Sec when State Government requires financing, they also raise loans from the market which are called State Development Loans. The minimum investment limit under this scheme is Rs. 10,000 with a maximum tenure of 10 years.
- Treasury Bills: Treasury Bills or T-Bills, which are money market instruments, are short-term debt instruments issued by the Government of India. This security also possesses a minimum investment of Rs. 10,000. The short-time periods are 91, 182, and 364 days.
- Sovereign Gold Bonds (SGBs): SGBs are government securities denominated in grams of gold. They are substitutes for holding physical gold. Investors have to pay the issue price in cash and the bonds will be redeemed in cash on maturity. The Bond is issued by the RBI on behalf of the Government of India. The minimum investment limit is a value of 1 gram of gold and the period of investment is 8 years, but there is the option of early encashment which is available at the end of 5 years.
Who Can Invest?
- To invest under this scheme and in these government securities, an individual needs to open Retail Direct Gilt Account (RDG) which acts similar to Demat Account.
- To Open an RDG account, one needs to have a mobile number linked with Aadhar, an Active Saving Bank Account with Net-Banking/UPI Facility, a Scanned Image of Cancelled Cheque (Optional), a Scanned Image of Signature(s) for Account Holder(s), and Original PAN.
- Any Indian Individual or Non-Resident Indian (NRI) can open an account under this scheme. But for NRI citizens, will be regulated under Foreign Exchange Management Act (FEMA) and will not be able to invest in SGBs.
How it is Useful for Individuals?
- Well Established Infrastructure provided by the Government of India
- No Credit Risk
- Different Maturity Periods of Government Securities as per the need of the individuals.
- Stable Returns
- Availability of Secondary Market to Buy/Sell
- Portfolio Diversification
- No Cost is required like account opening, etc.
The disadvantage of the Retail Direct Scheme:
- Interest Earned on the investments is fully taxable.
What Should Investors Do?
Investors who are looking for a regular flow of income (generally retiring persons, etc.) are well-suitable to opt for this Retail Direct Scheme of RBI. Hence, investors looking for some portfolio diversification can also invest under this scheme. Do follow due diligence before making any investment decisions.
Disclaimer: The information here is provided for reference purposes only and should not be misconstrued as investment advice. Under no circumstances does this information represent are commendation to buy or sell stocks or MF.