How elders gravitate to government bonds

Source: Economic Times

MUMBAI: Indian retail investors, particularly the elderly, are beginning to gravitate toward sovereign bonds despite a cut in the pledged rate of return, with the recent plunge in stocks globally serving to highlight the risks inherent in equity investments.

Monthly retail applications for the instruments yielding 7.75 per cent have nearly doubled, with people in lower income-tax slabs seeking to buy the bonds that offer more than conventional bank deposits through the tenure of  investment. The rate was earlier 8 per cent.

“We have been witnessing a surge in investment applications for such government bonds (7.75 per cent),” said Anil Chopra, Group Director – Corporate Affairs, at retail brokerage Bajaj Capital. “People see it as a safe and secure investment bet, especially amid looming rate uncertainties. Even the revision of rates did not curb investor exuberance.”

According to some large broking houses, retail monthly subscription significantly increased, running into thousands of crores over a period of two-three months.

Earlier in January, the government reduced the interest rate by a quarter percentage point while capping the investor base only to retail individuals. Earlier, charitable trusts were also allowed to invest. These bonds will now mature in seven years unlike the six-year maturity in the last series. There is no maximum limit for investments.

“If you stay invested for seven years, the absolute returns would be far more rewarding than any other bank fixed-deposit,” Chopra said.
An individual paying 20 per cent income tax could earn 6.2 per cent, net of tax, over the seven-year period. By contrast, the country’s biggest lender, the State Bank of India (SBI), offers 6-6.50 per cent for its fixed deposit schemes with 5-10 year maturities. These returns, however, do not include the applicable taxes.

“Mostly retired people, who seek to earn interest income in a simple and safe way, have suddenly turned to this sovereign product,” said Deepak Panjwani, head – – debt markets, GEPL Capital. “These investors are lured by absolute interest income that they will receive at maturity.”

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