With bank interest rates falling and nothing that even remotely resembles the facility of social security within sight, the government’s announcement for retail purchase (minimum up to Rs 1,000) of government security bonds has come as a great relief to pensioners.

The bonds offer high returns with almost nil risk factor and are welcomed by the middle income group with moderate savings, who can neither afford to risk money in equity nor have the complacency to let it rest in fixed deposits (FD) earning little interest. A large segment of people who are looking for safe and good returns on small savings are happy with the new development. However, banks are apprehensive of losing a large pool on money saved in FDs.

Observes a senior SBI official, “The choice is going to be obvious. Who would like to lock money to earn only 6-7 percent interest, which too may fall further. When the same security can be availed at 10-11 per cent, that too tax-free, people will opt for bonds.”

The segment of retired people whose money contributes to the largest pool in the FD segment may not shift money immediately, as they don’t like to take any risk, feels Naveen Sharma, Branch Manager, Investsmart. “It’s people in the age group of 30 to 50 years whose money will move to bonds. As such people who were investing in mutual funds were in fact indirectly investing in these papers. Now they will have the opportunity to directly invest in government bonds for retail,” he adds.

Inder Pal Singh, GM, IndusInd Bank, Sector 8, thinks it is the tax benefit that will swing the investor in favour of bonds. “If not now, in the near future government bonds are going to make a big dent to the banking sector. With zero risk, and a very strong secondary market, retail players are going to be involved in this segment. Experts are estimating Rs 20,000 crores worth capital moving to bonds. We had been demanding to make FDs free of TDS. Now in retail market it will be practically impossible to work out capital gain provisions for these bonds. I see a silver lining only in the fact that all these transactions will be in D-Mat form. This will offer a large fee base to the banks.”

But the investor is not willing to change loyalties so easily, “After US-64 debacle I would like to wait and watch before siphoning my money,” says Col Ranjeet Chaudhary.