retail in government securities: returns, simplicity and ... in... · in such a case why should...

5
FOLLOW ET: Login | Register Blogs Home Blogs Times View Campaigns City India World Entertainment Tech Sports Lifestyle Environment Science Spirituality Q&A Roots & Wings Business Reviews Retail in government securities: Returns, Simplicity and disposal are the big bumps April 22, 2015, 1:12 AM IST Economic Times in ET Commentary | Markets | ET By Madan Sabnavis The involvement of the retail sector in government securities (G-secs) has been spoken of in the credit policy and steps are being taken to enable it. While the effort is laudable and necessary, we need to go back to the basics and evaluate why G-secs have not been of much interest to retail investors. The issue is not of accessibility; it is conceptual. For a household to be interested in any retail financial product, the essentials are returns, simplicity and disposal. The focus has been on providing physical access through trading platforms, but the other issues have to be addressed. Today the returns on government paper are fairly skewed. If we look at say the 90-day, 364-day treasury bills and 5- and 10- year paper on a random day, they read like 7.87 per cent, 7.78 per cent, 7.79 per cent and 7.75 per cent respectively. These yields vary on a day-to-day basis. Contrast this with a bank deposit where the returns are fixed with the same security and are also higher. A one-year deposit gives 8-8.5 per cent. Further, the government has created an anomaly in its domain by pricing small savings better. While there are limits on Public Provident Fund (PPF), one can use post office instruments for diversification and get better returns. With there being no TDS one can also escape the tax network if one chooses to. In such a case why should anyone opt for a G-sec, which carries no tax 0 1 0 0 0 Indiatimes The Times of India The Economic Times

Upload: lamkhanh

Post on 11-Apr-2018

217 views

Category:

Documents


3 download

TRANSCRIPT

4/22/2015 Retail in government securities: Returns, Simplicity and disposal are the big bumps  ET Blogs

http://blogs.economictimes.indiatimes.com/etcommentary/retailingovernmentsecuritiesreturnssimplicityanddisposalarethebigbumps/ 1/5

FOLLOW ET:Login | Register

Blogs

Home Blogs Times View  Campaigns City  India World Entertainment Tech Sports Lifestyle Environment Science Spirituality Q&A Roots & Wings  Business  Reviews

Retail in government securities: Returns, Simplicity and disposal are the bigbumpsApril 22, 2015, 1:12 AM IST Economic Times in ET Commentary | Markets | ET

By Madan Sabnavis

The involvement of the retail sector in government securities (G-secs) has been spoken of in the credit policy and steps are

being taken to enable it. While the effort is laudable and necessary, we need to go back to the basics and evaluate why G-secs

have not been of much interest to retail investors. The issue is not of accessibility; it is conceptual.

For a household to be interested in any retail financial product, the essentials are returns, simplicity and disposal. The focus has

been on providing physical access through trading platforms, but the other issues have to be addressed.

Today the returns on government paper are fairly skewed. If we look at say the 90-day, 364-day treasury bills and 5- and 10-

year paper on a random day, they read like 7.87 per cent, 7.78 per cent, 7.79 per cent and 7.75 per cent respectively. These

yields vary on a day-to-day basis. Contrast this with a bank deposit where the returns are fixed with the same security and are

also higher. A one-year deposit gives 8-8.5 per cent.

Further, the government has created an anomaly in its domain by pricing small savings better. While there are limits on Public

Provident Fund (PPF), one can use post office instruments for diversification and get better returns. With there being no TDS

one can also escape the tax network if one chooses to. In such a case why should anyone opt for a G-sec, which carries no tax

0 1 0 0

0

Indiatimes The Times of India The Economic Times

4/22/2015 Retail in government securities: Returns, Simplicity and disposal are the big bumps  ET Blogs

http://blogs.economictimes.indiatimes.com/etcommentary/retailingovernmentsecuritiesreturnssimplicityanddisposalarethebigbumps/ 2/5

MORE FROM ECONOMIC TIMES BLOGS

PM Narendra Modi, a Janus-faced leader?

Time Income Tax department woke up to big data

Pranab Mukherjee is reshaping methods of the President’s

office

Taking you on non-vegetarian tour of Maharashtra

An untimely reminder: Ankit Keshri’s on-field death must spur

BCCI to…

FROM AROUND THE WEB

Be Patient: An Oil-Driven Spending Boom Is Coming The

Financialist by Credit Suisse

Why is China’s Economy Slowing? TheFinancialist by Credit

Suisse

4 Lesser Known Ways to Save Tax scripbox

The World's Fastest Growing Economies OZY

Lincoln’s Last Speech New York Times

benefits?

The second issue is that of simplicity. When a household is dealing with a savings instrument, it would like to know clearly what

the attributes are. Now a G-sec is confusing even for a financially literate person. There is a face value and a market price, which

varies every day. Then there is a coupon on a bond and a yield to maturity (YTM), which vary. This yield actually matters more

than the coupon and is indicative of the return for tenure. Therefore, what should one be looking for if one buys a security in the

secondary market? As the YTM changes every day, households cannot digest this easily.

Further, there is no clarity in the structure of these papers. A fixed deposit is a fixed deposit. In the G-sec market there several:

2, 3, 4…40 year securities whose tenures change every year. Also with a multitude of securities maturing in say 2020, there are

different five-year bonds with different coupons, YTM and market prices. How is one to decide which instrument to invest in?

Also, the 10-year benchmark is the 8.40 per cent coupon bond maturing in July 2024. Factually, this does not have a 10-year

residue term from today. Anyone dealing with this data will not know how to go about viewing such paper. All securities hence

have a moving maturity period for being valued in the market. Also, all paper is issued through an auction and the cut-off price is

different from the face value, which adds to the nebulous nature of these bonds.

This is unlike equity, where a share of a company is the same as any other share of the same company.

Third, disposal is a problem and if one looks at the CCIL trading screen, we do not have more than 15 securities traded on a

daily basis, and not more than five of them will have more than 100 trades each. Therefore, even if an individual chooses to

enter or exit there won’t be much choice.

Prima facie, this may not be an exciting market for the household. A way out is for the government to issue different papers at

face value similar to tax-free bonds, of say, NHAI. To ensure that there is liquidity in the secondary market, banks can buy

securities like PDs from individuals at any time at the going price. But then an 8.4 per cent bond for 10 years will be for a face

value of 100 and not the auctiondetermined price. The government has to pay a higher rate of interest. With PPF paying 8.7 per

cent and post offices around 8.5 per cent for five years, it cannot get away with the present yield of around 7.79 per cent.

Taking into account all these factors, it looks like the G-sec market for retail will be a slow starter, as one side has to give in. Also

if the government moves away to announcing fixed-rate bonds at a higher cost, then the rest of the market with accumulated

debt of the government will go awry as all outstanding securities will be re-priced, adding considerable volatility.

It may be best for the household to enter this market through the mutual fund route till we can iron out these issues.

(Madan Sabnavis is Chief Economist at CARE Ratings)

DISCLAIMER : Views expressed above are the author's own.

Recommended by

Be the first one to review.

Add your comment here

4/22/2015 Retail in government securities: Returns, Simplicity and disposal are the big bumps  ET Blogs

http://blogs.economictimes.indiatimes.com/etcommentary/retailingovernmentsecuritiesreturnssimplicityanddisposalarethebigbumps/ 3/5

1.

2.

3.

4.

5.

Author

Economic Times

We must stop appeasing Muslims… for their own good of course

Let’s bake in India first: Open up the agriculture sector to help our farmers and our economy

Everybody needs Rahul Gandhi

All eyes on Rahul Gandhi

Do the homework: Modi’s projection of India abroad needs to be backed by domestic reforms

Quick takes, analyses and macro-level views on all contemporary economic, financial and political events.

Most Discussed Most Read

4/22/2015 Retail in government securities: Returns, Simplicity and disposal are the big bumps  ET Blogs

http://blogs.economictimes.indiatimes.com/etcommentary/retailingovernmentsecuritiesreturnssimplicityanddisposalarethebigbumps/ 4/5

more »

All ET My Profile

Today Last 7 Days Last 30 Days Last 365 Days

Points: 500

Akshay Patil 1Points: 500

Suresh Babu 2Points: 500

Nithyanand 3Points: 500

Rajeshkumar Shah 4Points: 500

Sushil Kumar S 5Know more about Times Points

Popular Tags

bollywood aap cricket arvind-kejriwal congress government china manmohan-singh bjp inflation rbi mumbai food us upa anna-hazare india

narendra-modi supreme-court ipl rahul-gandhi modi delhi corruption pakistan

Recently Joined Authors

Like Us

Find us on Facebook

ET Opinion

13,549 people like ET Opinion.

Facebook social plugin

Like

Other Times Group news sitesThe Economic Timesइकनॉ㐰〼मक टाइ㈵〰स | ઈકોનોિમક ટાઈㄊ橔સMumbai Mirror | Times NowIndiatimes | नवभारत टाइ㈵〰समहारा〼੭㐠ㄭ टाइ㈵〰स | Go GreenLifehacker | GizmodoLiving and entertainmentTimescity | iDiva | Bollywood | ZoomHealthmeup | Luxpresso | TechnoholikGuylife | Online Songs | MensXP.com

Networkingitimes | Dating & Chat | EmailHot on the Web

4/22/2015 Retail in government securities: Returns, Simplicity and disposal are the big bumps  ET Blogs

http://blogs.economictimes.indiatimes.com/etcommentary/retailingovernmentsecuritiesreturnssimplicityanddisposalarethebigbumps/ 5/5

Copyright © 2014 Bennett, Coleman & Co. Ltd. All rights reserved. For reprint rights: Times Syndication Service

Car PriceUsed CarsOnline SongsHindi SongsBollywood Songs Restaurants in GoaBike Price IndiaNew CarsEvents in Goa

ServicesBook print ads | Online shopping | Free SMS | Website design | CRM | TendersMatrimonial | Ringtones | Astrology | Jobs | Tech Community | Property | BuycarBikes in India | Deals | Free Classifieds | Send money to India | Used CarsRestaurants in Delhi | Movie Show Timings in Mumbai | Remit to India | BuyMobilesListen Songs | News | TimesMobile | Real Estate Developers

Trending TopicsYahoo | Photogallery | You Tube | Gold Price | Twitter | Irctc | Renault Duster |Yoga | Aadhar Card | Facebook | Poonam Pandey Photos