- Wealth PMS (50L+)
How can you buy government bonds? Why should you buy them? Do you bond with the government? So many questions, so little time. So we’ll try and answer all but the last question in the context of The RBI Retail Direct Platform.
This is a new platform by RBI that allows retail investors to buy RBI bonds directly. It’s a simple process to work with so let’s start at the beginning.
Government bonds are the safest bonds on the planet in terms of rupee investments since the government effectively guarantees them. They obviously should carry the lowest interest rate compared to all banks, you would think. But it’s not always so. The government bond yield can be higher. Or, you might ask, why can’t I buy gilt funds instead, which own government bonds?
So here are the reasons you might want to buy government bonds:
It makes a lot of sense to buy a government bond for a long-term cash flow requirement with the highest safety level. A retired individual or family, or a person not very keen on taking risks, could use this to replace fixed deposits.
Remember though that there are disadvantages of government bonds:
RBI Floating rate bonds: has a set of long term locked in bonds, called Floating rate bonds. Interest rates will change with the post office National Savings Certificate (NSC) interest rates + 0.35%. (In Dec 2021, NSC rates are 6.8%, so the RBI Floating Rate bonds are 7.15%. Every six months, they will revise the interest rate accordingly. You can’t sell these bonds or pledge them for a loan. For seven years, you can’t exit (senior citizens get lesser lock-in periods). If you don’t mind the lock-in, this is a good alternative for a seven-year period.
Gilt and Target Date Mutual Funds: Gilt funds buy government bonds. You can’t control what maturity and yield you will get, but if you like the fund structure, they are a better structure for taxation. If you hold a gilt fund for three years, any subsequent exits get taxed at a lower rate for capital gains (20% including indexation for inflation). Additionally, certain Target Date funds exist (like Edelweiss PSU “Bharat Bond” funds, Nippon 2027 fund etc.), which allow you a similar level of safety with a target date, but without paying tax on the interest in the interim.
Fixed deposits:: To avoid price risk due to changes in interest rates, a fixed deposit is better than a government bond because it will give you no drop in the principal (only a lower interest rate if you withdraw early).
Other retirement products: Products like the PMVVY (7.4% from LIC, locked in for ten years, max 15L) and Senior Citizens Savings Scheme (7.4%, from a PSU bank, locked in for five years, max 15L) will make more sense for someone who has crossed 60 years of age. Beyond that, the RBI Floating Rate bonds are useful, and then, government bonds.
Having said that, it’s useful to go through the process.
You have to go through this process:
The Retail Direct Platform has two parts.
Here’s what the screen looks like:
You can click on a bond, but it won’t tell you that much, really. There’s a lot more work required on the portal. The “NI” Govt. Stock 2061 was like this:
A sample bond check: Let’s look at the basic steps of, say, the 6.1% Govt. Stock 2031. The government notification says it will pay interest on Jan 12 and July 12 of each year. The ‘coupon’ is what you get for every Rs. 10,000 face value. (Government bonds have a face value of Rs. 10,000)
So at 6.1%, you will get 305 on Jan 12, 2022, and then another Rs. 305 on July 12, 2022, etc. It matures on July 12, 2031 (not given here but
The “yield” is different because you will probably pay Rs. 9820 per bond. So for that price, your yield can be different. There are calculators to help find this, but I will put that at the bottom of the post.
You can buy bonds by entering a bid and paying for the bond in advance.
After you enter the bond, you have to transfer the money. This can be done through their fund interface, which allows you to transfer money using net banking or UPI. (Linked to the bank account you registered with them).
They’ll typically charge you a higher amount as a buffer, and the remaining money is returned the next day or so to your bank account. If the bid doesn’t go through, the full money is returned to your bank account.
Then the bond comes in and stays in your account with the RBI. Note that:
That’s pretty much all you need here.
You don’t automatically get access to the secondary platform. See the green NDS-OM icon on the primary platform? You have to click that, and a “request” will be automatically sent to the RBI. They will then come back to you and tell you that you’re okay. It took me three days. If you’re feeling nostalgic about the old days when the time was slow, and you send your application in triplicate and wait for the postman to deliver your letters, RBI will help you relive it. We suggest the song “Fast Car” by Tracy Chapman while away your time.
We will now tell you how to use the secondary platform of the RBI retail direct platform.
You have to log in to https://retail.ndsom.com/ after you get the permission above. You can see a list of bonds here – I’ve created a list below. Each one is a different bond for which you can bid.
What are these bonds?
Adding new things to watch/buy: Choose this from the add button. Here’s a list I got when I filtered for maturity in 2026:
There’s everything in there, but not everything is traded. To find out what’s trading, you have to check out the following link: https://www.ccilindia.com/OMMWOL.aspx where you can see any odd-lot bids for the day.
When you want to buy something, right-click and hit “Buy”:
To submit, you need money, so you will need to fund your account. This is done via the “Funds” button on the main screen – add funds. Remember that:
When you fund your bids, it will ask you to use UPI or net banking from the bank account you are registered. A screen like this pops up.
But what is brilliant is this: if you don’t have a trade on the same day, the money automatically comes back to you via UPI at the end of the day. They keep no balances! This is great because your money can continue to be with you except for the day when it’s traded.
For an annuity: Currently, very few banks offer a fixed deposit matching the ten-year yield of roughly 6.36%. And no bank offers 40-year bonds at all, where government bonds are trading near 7%. Annuities from insurance companies offer much lower (roughly 5% to 6%), which is better done through a 40-year government bond instead. So if you want a 7% taxable, long term bond (>10 years), your best solution is a government bond at this point.
For peace of mind: This is the safest deposit in the country if you want to hold it all the way. You can take a loan against it very easily (banks will love to give a loan against govt bonds). Currently, no broker can provide a “margin” against this, but you can pledge for a loan.
Special bonds: There are special bonds called “STRIPS”, which allow you not to get any interest and instead only get the principal at the end of a term. This is useful to lock in an interest rate and not worry about reinvestment (you will know exactly how much you get at the end of the term). This is the subject of a different post, of course.
Note: A gilt mutual fund holds such bonds and technically provides similar yields to holding a government bond portfolio. Those are better for tax (you do not get charged tax if the gilt fund receives interest). There are also “target date” funds (such as for 2027, 2030) etc. which you can use to target a certain end-date. These may be better ways to participate in the government bond market if you are in the highest tax bracket or do not need the cash flow (regular interest) and want more easy liquidity than the government bond route.
The retail government bond market is nascent, and the RBI platform to access it is new. The ability to buy government bonds directly from RBI allows retail investors to build really long term annuities. It’s not tax-efficient, but it does help in having peace of mind in terms of assured cash flow over decades. We encourage fixed-income investors to consider part of it for their long term cash flow needs. (Do check the disadvantages and alternatives in this article too!)
If you buy a 2031 bond paying a 6.1% coupon and pay Rs. 9820 on 2 December 2021, what is the return you’re getting? Use the formula in excel:
=YIELD(“2021-12-02”, “2031-07-12”, 6.1%, 98.2, 100, 2)
This says you have a bond bought on 2 Dec 2021, matures on 12 July 2031, pays 6.1% coupon, you pay Rs. 98.2 per Rs. 100, and interest is paid two times a year.
This will give you the answer: 6.35%
Now you might say listen; I get only Rs. 610 per year, and I invested Rs. 9820, so that’s only 6.21%. You are right. But you get back Rs. 10,000 at the end date, so that extra Rs. 180 is also a part of your return. This is what constitutes the “yield”. It isn’t apparent, we know, but you only have to get it once.
See our video on “What are bond yields?”