The new government bond plan will assist small investors | Motilal Oswal

New government bond plan for small investors

Government bonds are a type of government-issued financial instrument and are managed under the supervision of the Reserve Bank of India (RBI). These bonds are sold to the Indian public by the government to raise capital for public welfare projects. The government pays interest at a fixed or regular rate to investors who buy these bonds. The bond’s face value is paid to the investors at the time of maturity. 

Recently, India has allows individual investors to participate in the USD 1 trillion government bond market, in order to raise capital for public expenditures.

Read on to get a quick summary of how small investors can benefit from the government bonds scheme. 

  • A Quick Overview of the New Government Bond Scheme:

  1. India is planning on borrowing about Rs.12.05 trillion from the public through bonds by the end of this fiscal year in March 2022. The main reason for this undertaking is to support the government’s attempt to boost economic growth in the aftermath of the pandemic.
  2. The Prime Minister of India has declared that the scheme makes it possible for “the smallest investor to participate in the country’s economic progress” and has assured the public that the scheme will bring “good returns on a secure investment”. 
  3. India has followed in the footsteps of other emerging economies such as Bangladesh and Brazil in allowing the public to purchase sovereign bonds.
  4. Before this move, Indian investors could only access the government bonds market via mutual funds or other indirect channels. Now, individual investors can invest directly with a minimum allocation of just Rs.10,000 through central bank accounts.
  5. Market experts have recognized this as an important step for furthering India’s participation in the international bond market in the coming year, as it enables the government to raise funds from international investors as well. 
  6. In the period from April to September, Indian institutional investors have contributed about Rs.7 trillion.
  • What Do Experts Have to Say?

Experts have stated that the introduction of this scheme is essential as it can help in balancing out the influx of foreign investments with domestic investments in order to ensure economic stability. However, they also note appetite for long-term low-interest bonds is uncertain as global monetary policies are being tightened to fight inflation and interest rates are likely to rise. However, the expectation is that the investment will pick up in due time.

Conclusion

Government bonds are a viable and risk-free investment for smaller investors, as all interest payouts are guaranteed by the government. Hence when you invest in bonds of this nature, your risk exposure is considerably reduced. 

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