A government has different sources of revenue to pay for its expenditures. The expenditure can exceed the generated income, and if that happens, it creates requirements for further funding. At such times, a government has different means of collecting funds, among which government securities or G secs are popular. The government issues securities to the public and uses the collected funds as intended, while investors receive interest payments periodically and the principal amount on maturity. Treasury bills and government bonds are commonly known government securities that the central government of India issues.
The state governments of India are also permitted to issue securities, namely state development loans. There is one more type of security that comes with the backing of state governments, and that is the state government guaranteed bonds.
Read on as we explore the basics of G secs and further discuss the different aspects of state government guaranteed bonds.
Government Securities
What is g sec investment? The central and state governments of India offer various types of securities to investors. Basically, it is a debt obligation of the government. Here, investors invest while the government takes the loan.
These tradable investment instruments are issued with specific interest rates and tenure. Once the security units are paid for, they are transferred to the Demat Accounts of the investors. Through the tenure, the investors will enjoy coupon payments and get back the principal at the end of the maturity period.
Classification of Government Securities
Below is a quick overview of the different types of government securities based on the maturity period.
1. Short Term Government Securities: Tenure of less than 1 year; issued by the central government
a. Treasury Bills
- 91-day Bills
- 182-day Bills
- 364-day Bills
b. Cash Management Bills (maturity period of less than 1 year)
2. Long Term Government Securities: Tenure of more than 1 year, ranging up to 40 years
a. Dated Securities/Treasury Bond/Government Bond: issued by the central government
- Fixed Rate Bonds: Interest rates remain unchanged the entire tenure
- Floating Rate Bonds: Interest rates are pre-set at regular intervals the entire tenure
- Capital Indexed Bonds: The principal amount is linked with an inflation index to safeguard against inflation
- Inflation Indexed Bonds: The principal investment and interest remain protected against inflation
- Bonds with Call/Put options: Bond units can be bought back by the issuer or sold to the issuer before the maturity period ends
- Special Securities: issued to compensate entities like the Food Corporation of India, oil marketing companies, fertilizer companies, etc.
- STRIPS: Coupons and principal payments are stripped and sold individually
- Sovereign Gold Bonds: Investment made at the prevailing rate of gold
- 7.75% Saving (Taxable) Bonds: Issued at the said interest rates to individuals and HUF members
b. State Development Loans / SDL: Issued by the state governments
State Government Guaranteed Bonds
The answer to ‘What are government securities issued by the state governments in India’ is not limited to state development loans. Another subcategory is the state government guaranteed bonds.
Technically speaking, state government guaranteed bonds are issued by SOEs. SOE stands for state owned company. These are constitutional bodies formed legally by a state government to perform various commercial activities. Some examples of SOEs are oil corporations, power corporations, food corporations, etc.
Bonds are issued as more hassle-free and low cost alternatives to bank loans to collect capital from investors to source SOEs.
Here are some examples of the issuer and guarantor of state government guaranteed bonds.
| Issuer | Guarantor |
|---|---|
| Meghalaya Energy Corporation Limited | Meghalaya Government |
| UP Power Corporation Limited | Uttar Pradesh Government |
| Andhra Pradesh Power Finance Corporation Limited | Andhra Pradesh Government |
| Andhra Pradesh Capital Region Development Authority | Andhra Pradesh Government |
Understanding the Working Mechanism of State Government Guaranteed Bonds
The functional aspect of state government bonds is similar to that of treasury or government bonds. The bond is issued as per the requirements of an SOE. Large institutional, as well as retail investors, are eligible to purchase these bonds.
The bonds are issued through auctions and are also tradable in the secondary market. Investors can partake in the primary auction or buy from the secondary market. In any case, as the payment is made, the investor receives the units in their Demat Accounts. A coupon feature is followed, and the interest is paid at regular intervals. The principal amount invested by the investors is returned once the maturity period is over.
Advantages of Investing in State Government Guaranteed Bonds
These bonds have several perks to allure investors.
Low Risk
A bond in this category is always guaranteed by a state government, which has a very low chance of defaulting and minimizes the risk factor to a great extent.
Fixed Interest Rates
State government guaranteed bonds are generally issued with fixed interest rates, meaning they will generate the same amount of interest throughout the tenure without getting influenced by market volatility.
Regular Income Source
These bonds make interest payments in regular intervals, creating a steady source of regular income. This feature aligns well with the investment objectives of investors, especially senior citizens, requiring a steady income source.
Good Liquidity
Investors enjoy liquidity with state government guaranteed bonds as they can sell the bond holdings in the secondary market if needed.
Easy Finance Planning
The payment of interest and return of principal are pre decided and remain unchanged. The predictable nature of the investment makes financial planning and execution easier.
Ideal Investment Portfolio for State Government Guaranteed Bonds
Here are two points that are applicable here.
- Considering the low risk factor and other benefits, these bonds are best suited for low-risk investment.
- High risk investors can also profit from them. They can diversify their portfolio and create a balance against the risky investments with these bonds.
Latest State Government Guaranteed Bonds to Invest
The table below displays the latest state government guaranteed bonds to invest in.
| Bond Issuer | Interest Rate | Payments | Maturity Date | Credit Rating |
|---|---|---|---|---|
| Kerala Infrastructure Investment Fund Board | 9.14% | Quarterly | December 22, 2033 | AA |
| Kerala Infrastructure Investment Fund Board | 9.14% | Quarterly | December 22, 2032 | AA |
| Kerala Infrastructure Investment Fund Board | 9.11% | Quarterly | December 22, 2030 | AA |
| Kerala Infrastructure Investment Fund Board | 9.06% | Quarterly | December 22, 2028 | AA |
| Meghalaya Energy Corporation Limited | 9% | Quarterly | February 17, 2031 | A- |
| Andhra Pradesh State Beverages Corporation Limited | 8.96% | Quarterly | May 30, 2031 | AA |
| UP Power Corporation Limited | 8.90% | Quarterly | March 22, 2032 | A+ |
| UP Power Corporation Limited | 8.81% | Quarterly | March 30, 2029 | A+ |
Invest in G Secs and State Guaranteed Bonds with GoldenPi
Finding a comprehensive and reliable platform for investment is important for drafting the desired portfolio and ensuring a successful investment journey. GoldenPi can be of great help here. It is the first-ever fintech company in India to provide retail investors easy access to bonds and other government securities. From keeping the investors updated with all the latest issuances and their details to offering expert opinions whenever needed to streamlining the actual investment process, GoldenPi can be the ideal guide for your government security investments.
FAQs About What is G-Sec and State Guaranteed Bonds
1. What are government securities in India?
Government securities are debt instruments offered by a central and state government. In case of a deficit in revenue, a government can pool the needed amount by offering securities to the public instead of opting for a loan from the bank. The government backing makes the securities highly secure, and the steady interest generations ensure steady returns.
2. What are state government guaranteed bonds?
When a state owned enterprise of SOE, like a food corporation or an oil corporation, issues bonds to collect funds for their operations or developmental projects, these are called state government guaranteed bonds. The interest rates are fixed and are generated in the form of period coupon payments.
3. Are state government guaranteed bonds safe?
The state government guaranteed bonds have the assurance of the respective state government. In case of any unwanted scenario, the state government will take responsibility for returning the investment amount to the bondholders. So, the risk of default here is quite low.
4. What are the taxation regulations for state government guaranteed bonds?
The state government guaranteed bonds are taxable as other government bonds in India. Two types of tax are levied on them – tax on interest and tax on capital gains.
- The interest accumulated under the bonds is considered ‘income from other sources’ and taxed as per individual tax slab rates.
- If there is any capital appreciation, for example, if the bond is sold before maturity with a profit, it will be subject to tax. If a bond held for less than 3 years generates capital gains, it will be charged with STCG tax, which is as per tax slab rates. When held for over 3 years, long term capital gain (LTCG) tax will be levied at 10% (without indexation) or 20% (with indexation).
5. How do I evaluate the safety of state government bonds?
You can use credit ratings offered by CRISIL, IND, CARE, and other such reliable credit rating agencies to evaluate the safety factor of state government bonds. Here’s decoding the different ratings that you can keep in mind.
- AAA: Extremely safe
- AA+, AA, AA-: Highly safe
- A+, A, A-: Adequately safe
- BBB+, BBB, BBB-: Moderately safe
- BB: Moderately risky
- B+, B, B-: Highly risky
- C: Very highly risky
- D: Extremely risky
