Men looks up at an electronic screen displaying stock figures at the Bombay Stock Exchange (BSE) in Mumbai, India. (Photographer: Prashanth Vishwanathan /Bloomberg)

Zerodha Joins The Effort To Lure Retail Investors To Government Bonds

Retail investors love their equities. What stock to buy? What stock to sell? Those conversations are easy to spot. But try asking around for a view on government bonds and you are more likely to draw a blank.

Past attempts to improve the direct participation of retail investors in the government bond markets have had little success but discount brokerage Zerodha is making another attempt.

Earlier this week, Zerodha said it would launch a platform for retail investors to dabble directly in government bonds. The move follows the launch of stock exchange platforms in April, through which investors could bid for government bonds under the ‘non competitive bidding’ segment.

“The platform is targeting customers who invest in fixed deposits as government securities offer better returns,” said Nikhil Kamath, co-founder of Zerodha. In a release on the platform’s website, Zerodha tried to convince investors that direct investments in government bonds are a superior alternative to parking your money in fixed deposits and debt mutual funds.

To be sure, some banks including IDBI Bank Ltd. and Axis Bank Ltd. already offer retail trading in government bonds through their respective platforms. Zerodha adds to that.

Through these platforms, retail investors can place their bids for treasury bills between Monday and Tuesday and for bonds between Tuesday and Thursday. Investors can pick the government security of their choice, say the 10-year benchmark bond. The minimum bid that can be placed is Rs 10,000 and the maximum is Rs 2 crore.

If the bids are accepted, the securities will be credited to the investor’s account within two days and all interest payments received on the bond will go directly to the bank account.

Easier Said Than Done

In theory, retail investing in government bonds is simpler than investing in equities. You have to look at the country’s economic fundamentals, form a view on inflation and interest rates over your time horizon, and invest. It certainly sounds simpler than trying to go through the financials of hundreds of companies to pick one to invest in.

In practice, though, retail investment in government bonds has failed to gain traction in the past.

This is primarily because of the lack of liquidity in retail trading of government bonds, explained Harsh Roongta, an independent investment adviser. “When trading in equity, we are accustomed to order book matching, through which equity can be bought and sold with ease. That is not the case with G-secs,” Roongta said.

Resulting from poor liquidity, retail trading in government securities is inevitably done with an outlook to hold.
Harsh Roongta, Investment Advisor

Lack of ‘market makers’ also creates a buy-sell mismatch. When there are no market makers, difference between bid and offer is often high, Roongta added. Besides, investor education is needed before retail investors become more conversant with concepts like yield to maturity, which can differ from the coupon rate on individual bonds, he said.

A bond’s coupon rate is the rate of interest a bond holder earns. The yield is the estimated rate of return based on the assumption that it will be held until its maturity date.

A Long Journey

Institutions, such as banks, insurance companies and mutual funds, are the most significant investors in the government bond markets. The complexity of the product and the trading systems meant that few other than these large institutions would trade in government bonds.

In August 2016, the RBI allowed retail investors direct access to G-sec trading by allowing them to buy and sell directly through the RBI’s system known as the NDS-OM (Negotiated Dealing System-Order Matching) platform.

In 2017, the central bank said that specified stock exchanges will be “permitted to act as aggregators/facilitators for retail investor bids in the non-competitive segment for the auction of dated securities and treasury bills of the Government of India.” In April this year, stocks exchanges launched these services.

The RBI permitted non-competitive bids for up to 5 percent of the notified amount for specified auctions. However, it is unlikely that this amount is completely subscribed to, said Roongta.

The tax treatment of investment in government securities is also not conducive for retail investments, added money market expert Neeraj Gambhir. Unless policy makers rationalise tax on government securities, savvy investors will revert to investing in bond funds.

Interest income and capital gains on G-Secs are both taxed. While the interest income attracts tax at the marginal tax rate, the capital gains are taxed at 10 percent. The tax on debt funds held for less than three years is calculated as per the income tax bracket for that individual. Debt funds held for more than three years are eligible for long-term capital gains tax of 20 percent.