RBI's newly floated Retail Bond Scheme is getting a lot of attention from Non-Resident Indians (NRIs). Under this scheme, an individual investor can open a Gilt Securities Account — “Retail Direct Gilt (RDG)” account directly in the primary market as well as buy/sell in the secondary market. Non-Resident retail investors eligible to invest in Government Securities under Foreign Exchange Management Act, 1999 are also allowed to open an account with the RBI and invest in government securities via the RDG Scheme. The primary reason could be higher returns. "The yield of the Indian Government Bond at 6.5% to 7% is much higher than the developed market sovereign debt which falls under a similar risk profile. This new scheme must therefore be a desirable secure debt option for NRIs," says Sonam Srivastava, founder, Wright Research, SEBI-registered RIA.
NRI investors, as per Abhay Agarwal, founder and fund manager of Piper Serica, SEBI Registered PMS, have limited options to invest in debt instruments in the country. They cannot open a fresh PPF account. They are not allowed to invest in high yielding small savings schemes such as National Savings Scheme and Kisan Vikas Patra. NRIs from the U.S. and Canada face restrictions from mutual fund houses and very few allow them to invest. Further, the expense ratio in mutual funds eats into their returns. NRIs can invest in bank deposits and corporate deposits, but these are available for tenures of only 5-10 years. " Most of these opportunities like debt funds and fixed deposits come with high fees and taxes," says Agarwal. Also, they have to adhere to tough compliances while investing.
Theoretically, it looks like a wonderful debt investment for NRIs but fund managers caution about the risk. As per Srivastava, if interest rates rise globally or when the rupee depreciates, these factors can take down the “real value” of the higher returns. However, "the interest rates rise will not matter to NRIs who are looking to hold till maturity," says Agarwal.
Srivastava adds that investors should also be aware of the fact that there is no clear indication of the liquidity or the execution of these schemes.
Despite small hiccups, no credit risk, easy application process via a digital platform, lower transaction charges and predictable cash flows make it a viable option for non-resident investors to lock in their funds for a long time.
"We expect that as the awareness about this scheme increases it will attract a larger number of NRI investors," says Agarwal.
Using the RDG account, retail investors can buy and sell government securities through the RBI's online portal. Retail Direct Account is completely free of charge and does not involve any intermediary. It would reduce overall transaction charges for individual investors in terms of the charges which they are otherwise required to pay for investing through aggregators or taking indirect exposure through mutual funds.