The Indian Retail Debt Market is well set to expand further with a wide range of debt securities available for retail trading at public exchanges and the growing market participation. Some of these debt securities are Government Securities (G-Sec) – Zero-Coupon Government Bonds, Coupon Bearing Bonds, Treasury Bills, STRIPS. Let us understand STRIPS before pouring light on its benefits.
What are STRIPS?
STRIPS (Separate Trading of Registered Interest and Principal of Securities) are essentially Zero-Coupon Government Bonds investments. These are formed out of existing G-Sec bonds. These are not auction-based securities. Being G-Secs, they are eligible for Statutory Liquidity Ratio (SLR).
STRIPS are reconstituted by splitting the cash flows from a G-Sec into individual securities. The cash flows of G-sec bonds are a periodic interest and the principal repayment to be paid by the issuer.
How G STRIPS Work
Stripping is the process of isolating coupon-bearing bonds into their individual coupon and principal components.
Investors can hold and trade G-sec STRIPS separately – individual interest and principal components of eligible G-Sec as separate securities.
All fixed coupon G-Secs, irrespective of the maturity, and that are transferable and eligible for SLR eligible can be Striped.
For example, if Rs.1000 of the 7.8% G-Sec 2025 is stripped, each periodic coupon (interest) (Rs. 39 each semi-annual) will be a coupon STRIP, and the principal (Rs.1000 at the term-end) will become a principal STRIP. These are traded separately in the secondary market.
Another example – A 8-year bond is eligible for striping into 16 coupons and a principal instrument. All these become zero-coupon bonds and can be traded separately.
What are the benefits of G-Sec STRIP Investment?
- Zero Reinvestment Risk
Being zero-coupon bonds, STRIPS has zero reinvestment risk that make the investment attractive to retail investors. These are considered more secure than AAA Corporate Bonds. Investors with a low-risk profile like individual/non-institutional customers can consider G-SEC STRIPS. Hedge funds, Pension funds and Insurance companies are equally interested in STRIPS.
- Options Available for Different Tenure
Financial goals differ for every investor, and they need diverse investments that can be aligned with their set objectives. One such investment is STRIPS. Investors can choose from Coupon STRIP and Principal STRIP available with broadly classified term options based on their financial requirements for established goals.
- Higher Returns than Other Debt Securities
STRIPS can offer better returns than FD and tax-adjusted AAA corporate bonds. As a STRIPS investor, you will periodically receive the bond’s original coupon payouts (g-sec rates). For example, if the coupon on a bond is 6% (half-yearly), the interest will be received twice because of the semi-annual payment schedule.
- Low Government Bond Investment Amount
Investors need not invest huge funds in G STRIPS. With the reliving investment terms, you can invest as low as Rs.1000. It is the lowest minimum investment that you can increase as per your financial goals to be achieved with a G-Sec STRIPS investment.
STRIPS are created by splitting each of the cash flows from government security bonds. As it is an investment in Government bonds, these are free from default risks and considered a safe investment.
How to Buy G-sec STRIPS
Investors need an SGL account with the Reserve Bank of India (RBI) to buy STRIPS. You can place requests for STRIPS directly in e-kuber for stripping of eligible securities.
Gilt Account Holders’ requests for STRIPS will be placed through the respective Custodian that is maintaining the CSGL account.
Thus, STRIPS investment is a popular choice for investors looking for fixed-income through high credit quality bonds with the support of the government. For more guidance on ‘how to invest in G STRIPS’, you can approach financial investment advisors experts in Fixed Income Securities or can buy g strips online from Bondsindia.