Low-risk investment instruments are always in demand among both risk-averse and high-risk investors. On one hand, these tools ensure safety and stability, and on the other, they help diversify and balance investment portfolios. Government securities have been a popular option in the low-risk investment sector for a long time now. The range of government securities issued includes both central and state government bonds, offering investors a variety of secure investment choices.
The central government of India, the state governments, and municipal corporations issue various types of government securities featuring different tenures to raise funds for development projects and other funding requirements. RBI manages the issuance and holds auctions for the same. With the recent Retail Direct Scheme, retail investors now also have direct access to primary auctions and secondary markets.
The funding requirement may vary, which leads to the offering of many types of securities. They can be classified based on the duration of their tenure, the type of interest rates offered, their tax treatments, and so on. Listed below is a precise categorization enlisting all the types of government bonds in India with their detailed overviews. Read on to find the best fit for your investment portfolio.
Government Securities Categorization
Based on the maturity period, there are two types of government securities in India. More variations exist within the sub-categories, as mentioned below.
Short Term Government Securities
Short term government securities are issued with a tenure of less than 1 year to meet short term financial requirements. Typically, the central government offers these. Here are the two sub-categories.
Treasury Bills (T-bills)
Treasury bills are money market instruments offered for a maturity period of 364 days or less. The government issues these securities to meet current funding needs and minimize the overall fiscal deficit. These are essentially zero-coupon bonds. In lieu of any interest payments, they are offered at a discounted price and redeemed at face value. For instance, a bond with a face value of INR 100 can be issued at INR 90, but upon maturity, the investor will receive INR 100. These offer a quick way to grow capital.
Treasury bills can be further divided into 4 types with similar features, where the tenures are different.
- 91-day bills
- 182-day bills
- 364-day bills
2. Cash Management Bills (CMBs)
The Government of India launched cash management bills in 2010 to solve temporary cash flow imbalances. Their key feature is the maturity period of less than 91 days. They have a similar zero-coupon feature, like T-bills and are issued with a discount. Since their introduction, these securities have been issued mostly for tenures varying from 7 days to 84 days.
Long-Term Government Securities
Government securities with tenures of 1 year or more, which can range up to 40 years, are called long-term government securities. The central government, the state governments, municipal corporations, and PSUs generally offer securities under this category.
Dated Securities/ Treasury Bonds/ Government Bonds
The Government of India issues the following dated securities, popularly known as government bonds, via RBI.
- Fixed Rate Bonds
Certain government bonds are issued with a fixed interest rate and continue to generate coupon payments at the same rate without any changes till maturity. The tenure can be anywhere between 1 year and 5 years, and a longer tenure can yield higher interest rates. These debt instruments are best suited for investment goals of a steady income and low-risk tolerance. They will make financial planning more predictable and accurate. Investors will enjoy good liquidity in the secondary market.
- Floating Rate Bonds
The coupon rate is not fixed under the floating rate bonds. The term float here indicates the resetting of the rates at regular intervals. State-guaranteed bonds, on the other hand, typically offer a fixed coupon rate, providing more predictability and security for investors. The reset generally happens once or twice a year. Before each date, RBI announces the new rate, which tends to be 35 points higher than the prevailing National Saving Certificate interest rate. While the overall returns may seem hard to predict, these instruments often offer higher rates than others. Furthermore, they can generate hefty coupons when the market rates go high. Note that the tenure of such instruments is between 2 years and 5 years, and coupons are generally paid on a semi-annual basis.
- Capital Indexed Bonds
These fixed-income debt instruments, among the different types of government securities, are designed to provide protection against inflation along with semi-annual coupon payments. The principal investment value is linked to a particular inflation index, like the Consumer Price Index or the Whole Sale Price Index, and gets adjusted with any movement of the same. For instance, if the selected inflation index goes up, the principal value and interest will be paid on the latest adjusted principal.
- Inflation Indexed Bonds
Inflation-indexed bonds are another type of hedge against inflation. Under these bonds, the interest rate, in addition to the principal amount, gets adjusted as per the ups and downs of the inflation index. This way, both coupon flow and principal amount stay safeguarded from inflation.
- Bonds with Call/Put options
Liquidity or the ease of selling (cashing out) the investment is an important parameter for investors to ensure financial stability in times of emergency and protection from market volatility. The call/put options are particularly beneficial here. The issuers can buy back the securities by implementing the call option, which can reduce their increased liability due to the growing market rates. Investors can sell the securities back to the issuers by exercising the put option. Note that the transaction can occur only on the date of interest disbursal, after the lapse of 5 years since issuance.
- Special Securities
Special securities are generally offered to oil companies, food companies, fertilizer companies, and other such entities at times. Examples include food bonds, oil bonds, fertilizer bonds, and so on. The government of India can opt for a special security to meet its monetary liability towards an entity. Said entities can list the special securities in the secondary market for raising funds, where primary dealers, insurance companies, banks, and similar organizations have access to purchase. It is noteworthy that special securities are issued with higher interest rates than others.
- STRIPS
STRIPS are not new issues. They are zero-coupon bonds created from existing securities. Suppose a security has been issued for a maturity period of 5 years and offers semi-annual coupon payments. The number of overall payments generated under the bond will hence be 11. STRIPS will allow the issuer to divide the 11 payments into 11 different securities.
- Sovereign Gold Bonds (SGBs)
Gold holds great economic, cultural, and emotional value in India, which results in a never-ending demand. Gold prices tend to stay high during financial crises, making it an attractive investment option. However, the buying and safekeeping of physical gold is hectic, stressful, and even costly. Through the launch of the sovereign gold bond or SGB scheme, the government of India created a new channel for investing in digital gold at the prevailing rate of gold.
- 7.75% Saving (Taxable) Bonds
The government of India introduced a new bond with a fixed interest rate of 7.75%, which is taxable as per the IT Act of 1961. Individual investors (non-NRIs) and Hindu Undivided Family members are eligible to apply and invest. The tenure can range up to 7 years. Premature redemption is not permitted for regular investors. Senior citizens belonging to age groups of 60 – 70, 70 – 80, and above 80 can withdraw after the completion of 6, 5, and 4 years, respectively.
SDLs
The Indian state government offers state development loans or SDLs to raise capital for different development projects. The respective state government is responsible for the returns, and the sovereign security ensures a low default risk. The coupon rates are mostly fixed and paid out half-yearly, while the principal amount is returned after maturity. The yields are generally higher than other government securities. The lock-in period can go up to 10 years or higher.
Other Government Securities
Besides the central government and the state governments, some other entities are also permitted to offer bonds.
PSU Bonds
The government has more than 51% stake in a PSU or public sector undertaking. A PSU, like a PSU bank, a power sector company, a housing corporation, or the railways, can offer PSU bonds with lock-in periods ranging up to 15 years to raise the required funding. The bonds can feature a fixed rate or a floating rate of interest. The bond-issuing PSU is responsible for repayment, but the bonds have a government backing that adds a protective layer against default.
Municipal Bonds
Municipal corporations can issue bonds with maturity periods between 1 year and 30 years to fund infrastructural development projects or operational causes. These bonds offer yearly or half-yearly coupon payments and a principal payment on maturity. SEBI has set strict guidelines instructing the eligibility criteria to reduce the risk of default as much as possible. For instance, municipal corporations with no default history in the past year or negative net worth in the past 3 years can only offer municipal bonds.
Foreign Bonds
Similar to the Indian Government, many governments around the world offer different securities. A government of one country can issue securities to investors belonging to a different country. Such investment instruments are termed foreign bonds. The transaction is made in the prevailing currencies of the investors’ country. Further features and details vary from one issuer to another.
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FAQs About Types Of Government Securities In India
1. What are zero coupon bonds?
The term coupon translates to interest. Zero coupon bonds are the ones that offer no interest or coupon payment like regular bonds do. They are often issued at a discounted price but return the original face value of the bond at maturity.
2. What are the interest rates of government securities in India?
There are many types of government securities in India. They can offer different interest rates of different types. For example, the 7.75% Saving (Taxable) Bonds offered the same rate at any given time, but the coupons of floating rate bonds are changeable. An average of 7.5% interest rate can be expected from government securities.
3. What is the best way to invest in government securities?
The best way to invest in government securities is via a user-friendly and simple platform like GoldenPi. All the available securities will be mentioned with the essential details. You can complete the KYC and proceed with the investment in a few quick steps.
4. Can I sell Gsec before maturity?
You can sell a Gsec before maturity to the issuer itself or in the secondary market. The regulations will vary based on the security you have invested in.
5. Can I buy Gsec directly from the RBI?
You can buy Gsec directly from RBI under its Retail Direct Scheme. Create a Retail Direct Gilt Account on the Retail Direct Portal. Then, you can participate in primary auctions and also have access to the secondary market.
6. Are government securities better than FD?
Government securities and FDs offer low default risk and are both quite popular. However, government securities tend to offer higher interest rates than fixed deposits. Moreover, with recent developments in the Indian government securities market, investment has become more effortless for retail investors.
7. Do all government securities have the call/put options?
Some government securities offer call/put options, but not all of them. The bond details will be mentioned the same.
