The inflow of investment avenues in the Indian market has scaled up significantly. As a result, investors are thrown open to an array of opportunities to explore several risk-return alternatives.
State development loans, or SDLs, are one investment avenue investors have preferred in recent years.
Let’s understand more about state development loans and how they benefit an investor.
What are State Development Loans (SDLs)?
State development loans are long-term securities offered by states to address their market borrowings requirements. State governments issue such dated securities to fund the fiscal deficit.
However, every state can borrow up to a fixed limit via state development loans.
What Are The Benefits Of Investing In State Development Loans?
Here are the benefits of investing in state development loans:
- Fixed Income Source: State development loan securities provide half-yearly interest to the investors. Hence, investing in such debt instruments is a fixed-income source for investors.
- Lesser Risk: Compared to AAA bonds, state development loans have lower risks and offer a sovereign guarantee. Add to it; such dated securities are monitored by the RBI, which adds to its overall security.
- Possibility Of Higher Yields: SDLs are widely acknowledged as a safe investment that yields higher interest. However, the yield percentage sometimes declines due to certain conditions.
- High Liquidity: State development loans have a higher demand from several institutional investors. As a result, it is considered one of the most liquid debt securities. For an SDL securities holder, it is one of the principal investment benefits of SDLs.
Features of State Development Loans
Here is the list of essential features of these dated securities:
- SDL is a market-linked instrument and follows a specific borrowing structure to access funds from the open market. SDL debt instruments are the authorised securities of the RBI. Such securities are reliable collaterals that meet the bank’s Statutory Liquidity Ratio (SLR).
- Furthermore, they also serve as collateral to get liquidity under the RBI’s Liquidity Adjustment Facility (LAF).
- RBI supports the issue of state development loan securities in the market. In addition, the RBI can repay state development loans out of the funds allocated by the central government for states.
- Compared to fixed deposits banks offer, state development loan bonds appeal more to investors. Such debt instruments also add a factor of safe investment for potential investors.
What kind of Mutual Funds Invest in State Development Loans?
Several debt funds invest in state development loans, namely:
- Passive funds: Several fixed-income index funds or Exchange Traded Funds (ETF) invest in SDLs. In the absence of ETFs, investment in index funds participating in ETFs is highly recommended. However, a Demat account is needed to invest in ETFs.
- Active Funds: Short duration debt funds do not prefer to invest in SDLs since such instruments have long-durations. Long-duration funds like dynamic bond funds, long-term debt funds, etc., invest in SDLs. Corporate funds also invest in SDLs to integrate high-credit quality in their portfolios.
Who Should Invest in SDLs?
The government offers SDLs. Hence, such dated securities are considered highly secured investment options. Investors who prioritise investment security over returns should invest in state development loans.
Additionally, investors who lack experience in mutual funds investment and wish to diversify their portfolio can consider investing in SDLs. It will help them to balance the risk-return in their portfolio.
How can I invest in SDLs?
You can opt for the primary or secondary market route to invest in SDLs. In the primary market, such debt instruments are purchased via RBI-conduced auctions.
In the secondary market, SDLs are purchased on stock exchanges.
Tax on Interest from SDLs
Similar to any debt instrument, interest acquired from SDLs is taxable. After a maturity of 10 years, a long-term capital gains tax of 20% after indexation, along with applicable surcharge and cess, is applicable on the interest income.
Why are SDLs Issued?
Such long-term securities help state governments to fulfil their planned expenditures when there is a fiscal deficit. SDLs help state governments to address several expenditure requirements via bond issuance.
More about State Development Loans (SDLs)
Here are some additional and crucial points to cover about SDLs:
- SDLs Issue and Marketability: SDLs do not have any credit risk and offer a higher yield. As a result, banks have invested in such bonds in recent years, enabling states to meet their borrowing obligations. The RBI trades such government securities via its dedicated online auction system.
- SDLs Trading Mechanism: RBI handles the trading in SDLs via its dedicated online system. Negotiated Dealing System-Order Matching manages this online electronic system.
- SDLs interest rate or yield: For such debt instruments, the interest rate is more than other central government securities with similar features. However, the yield is established via auction.
Why Invest in State Development Loans Securities?
SDLs securities provide a stable and robust source of fixed income for several investors. The SDL securities holders in India receive interest bi-annually.
Furthermore, investment in such dated securities is safer than other debt instruments.
Who Should Invest in Debt Funds Investing in SDLs?
Those investors who want to enjoy risk-free investments and prioritise the security of investments are ideal candidates for such debt instruments.
Investors with zero experience in mutual funds but who want to diversify their investment portfolio can also invest in SLDs.
Is Investing in SDL Securities Safe?
Yes. SDLs are considered safe for investment. Such debt instruments come with a sovereign guarantee.
Should I Invest in SDL Securities?
If you are an investor looking for a fixed and extra source of income, SDL securities is the right fit for you.
How much can I Invest in SDL Securities?
It depends on your annual financial objective and risk-taking capacity.
How can I Secure my Investment further in SDL Securities?
It is always recommended to check the financial status of the state prior to investing in state-issued SDLs securities.
Why are State Development Loans (SDLs) Issued?
SDLs are offered by states to manage their revenue requirement and overcome their fiscal deficit.
Are SDL Interest Rates Higher than Bank Fixed Deposits?
Yes. SDL interest rates are around 6.5-7.5%. It is higher compared to the interest rates offered by fixed deposits. Bank fixed deposits offer interest rates between 4-6% in the present scenario.
Are SDLs Risk-free?
No. SDLs are not completely risk-free; however, there is a sovereign guarantee of repayment. The risk is considered to be severely low because RBI can assign the central-government funds for the repayment of the debts if SDLs are not reimbursed.
Is it Better to Invest in a Debt Mutual Fund or SDLs?
Debt mutual funds have several levels of risk. Some debt mutual funds have lower risk; however, they do not have government support. In contrast, SDL has sovereign backing.
Not to mention, such securities have very low risk and can be an ideal fit in your portfolio.