While a government has its specific revenue for all funding requirements, a liquidity crisis can occur. When that happens, the government will require a new source of finance. The idea behind offering government securities to interested investors is to meet the gap in funds required for infrastructure development projects or other budget deficits. Government securities basically indicate the debt obligation of the government, as in it takes a loan from investors and pays interest on it.
Currently, there are several types of government securities available in India, each with individual features and benefits. High safety ensured by sovereign backing is the prime advantage that draws investors. Read on to get a thorough comprehension of government securities and learn all the important factors to make the correct investment decisions. We will further elaborate on a seamless G sec investment guide!
What are Government Securities?
Government securities are tradeable instruments, mostly offered at a fixed interest rate and pre-set maturity period. Once the bond has been issued and purchased, the government will make periodic interest payments to the investors on a semi-annual or annual basis and return the primary investment amount on the date of maturity.
The Gsec India market primarily saw large institutional investors, but it has become more accessible for retail investors in recent years. The credit goes to the Government Securities Act, 2006, and Government Securities Regulations, 2007, along with the introduction of dematerialized holding and guaranteed settlement with Clearing Corporation of India Ltd.
What are the Different Types of Government Securities?
The central government, state governments, local municipal bodies, and PSUs issue government securities. Below is a brief overview of their many types.
Short Term Government Securities
G secs with a tenure of less than 1 year are termed short terms. This category has two options.
Treasury Bills (T-Bills)
Treasury bills come with tenures of 91 days, 182 days, and 364 days. These money market instruments have no coupon payments. However, they are offered at a discounted price and generate the original face value on maturity.
Cash Management Bills (CMBs)
Cash management bills are similar to T-bills in terms of characteristics; the difference lies in the tenure, as CMBs come with a fixed tenure of less than 91 days. The Government of India introduced this security in 2010 with the aim of meeting temporary funding requirements.
Long Term Government Securities
When the maturity period is of 1 year or more, the government securities are considered long term tools.
Dated Securities/Treasury Bonds/Government Bonds
The central government of India offers these bonds or dated securities for various development projects and budgetary requirements. The tenure range from 5 years to 40 years.
- Fixed Rate Bonds: Securities offered with a fixed interest rate that remains unchanged the entire lock-in period
- Floating Rate Bonds: Interest rates to be reset at regular intervals, like yearly or half-yearly, throughout the tenure
- Capital Indexed Bonds: Principal investment amount linked with the accepted inflation index (like CPI), safeguarding against inflation
- Inflation Indexed Bonds: Coupons and principal amount moves in the same direction the inflation index does
- Bonds with Call/Put options: The call enables the bond issuer to buy the bond back, and the put option allows investors to sell before maturity
- Special Securities: Offered to specific entities like food corporations or oil marketing companies at a higher rate than other securities
- STRIPS: Coupon payments and principal payments are separated and sold as individual securities
- Sovereign Gold Bonds: Bonds issued at the current rate of gold
- 7.75% Saving (Taxable) Bonds: Offered at a fixed rate to individual investors and HUF members
SDLs
State governments of India can collect funds for infrastructural or development projects via state development loans or SDLs. These securities generate semi-annual coupon payments and return face value on maturity.
PSU Bonds
Public Sector Undertakings (PSUs), where the government has more than 51% stake, can issue bonds, often with fixed rates and coupon payment features. The tenure can range up to 15 years.
Municipal Bonds
Local municipal bodies can raise funds via bond issuance. The tenure for such bonds can be up to 30 years. The features remain the same as most government bonds; however, SEBI has specific guidelines to be followed. For instance, municipal corporations must not have any record of default in the last 1 year.
Foreign Bonds
Indian investors can invest in bonds issued by foreign governments. These are called foreign bonds and work according to the respective guidelines set by the issuing country.
Why Invest in Government Securities?
Considering the various types of government securities and their respective features, finding suitable picks for different investment portfolios will be an easy task. Here are the general perks investors receive when investing in these tools.
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Safety
The issuer of G secs is always a government, be it at the central level, state level, or local municipal level. Since the government directly backs the investment, the chances of default are quite low.
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Stable Income
Most government securities offer periodic coupon payments, which can be twice or once a year. This turns the investment into a regular source of income. Many investors, like retired senior citizens, can benefit from this feature.
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Efficient Liquidity
G secs tend to have a specific tenure, including long-term options going up to 40 years, creating great long-term opportunities. That said, investors can enjoy liquidity by selling the security in the secondary market.
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Tax Benefits
Investments are subject to tax impositions. However, with G secs, many tax benefits are available. For instance, TDS does not apply to the interest. Tax is not levied on the interest accumulation of tax-free bonds.
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Portfolio Diversification
The addition of government securities can reduce the overall risk of an investment portfolio. It will be specifically helpful for high-risk investors.
How are Government Securities Issued?
The responsibility of issuing securities on behalf of central and state governments falls on RBI. After discussing the requirements of the respective government, RBI publishes a half-yearly auction calendar that contains all important information regarding said security. The government issues a notification and press communique 1 week prior to the date of issuance. RBI further publishes press releases and newspaper advertisements.
The securities are issued via an auction that RBI conducts on E-Kuber. Investors holding current accounts or securities accounts can participate in the auctions. Retail investors with no accounts can also buy dated securities and T-bills through non-competitive auctions.
How to Invest in GSec: GoldenPi Brings an Easy Guide
GoldenPi is committed to making bond investment more accessible and convenient for investors. Visit the platform, and you will find all the crucial information on government securities, along with the latest issues. A comparison of available options will be easier as they are listed in a transparent table-like format. If you want to get an update on a new issuance as soon as it becomes available, the Notify Me button will be helpful.
Note that KYC is compulsory before you start your investment journey. On GoldenPi, you can complete this requirement quickly by uploading soft copies of documents. Once the formalities are done, proceed to select the correct security and make the payment. You will find necessary guidance and expert assistance within easy reach whenever needed.
FAQs About Understanding Government Securities (G secs) in India
1. Are government securities good investments in 2024?
Government securities continue to offer one of the highest safety levels in the investment markets and a steady income. Investment has become convenient for retail investors, too. All things considered, government securities are among the best investment options in 2024.
2. What is the best way to invest in G sec bonds India?
Direct government securities investment is possible through RBI. GoldenPi offers a transparent and comprehensive platform for easy investment. You can invest in 3 quick ways, which include KYC, security selection, and payment.
3. What is the interest rate of government securities?
The interest rate varies from one G sec to another. In most cases, the rate stays fixed throughout the maturity period, and in some securities, the rate keeps changing. You can expect 7.5% on average.
4. Are fixed-rate bonds better or floating-rate bonds?
The correct answer depends on the investment goal and risk tolerance. Fixed-rate bonds offer steady and predictable interest, making financial planning easier and more reliable. On the other hand, floating rate securities, while unpredictable, can help investors take advantage of market rate hikes. Decide what kind of investment you need and pick accordingly.
5. How does the calculation of treasury bill returns work?
Suppose the face value of a treasury bill is INR 100. After the discount, the price was INR 90. On maturity, you will receive the face value, which is INR 100.
6. Should I invest in government securities?
If you are looking for a low-risk investment tool with regular payouts, government securities will be suitable for you. There are different tenures and features available, which will help you find something that aligns with your investment goal.
7. How to evaluate the risk factor of municipal bonds?
SEBI makes a credit rating of BBB- or higher mandatory for municipal-al corporations to be able to issue bonds. This ensures the safety of such bonds. You can use the credit ratings for your evaluation. The higher the rating goes, the lower the risk of default.
