It is often believed that investing is for people with deep pockets and a robust risk appetite. However, this is not the case. Every investor has a different appetite for risk holding and investing. Some choose to invest in the high-risk, high-reward categories, while others pick low-risk investments. Investors with less risk can also invest and earn decent returns; it all depends on what they are investing in. For such cautious investors, investing in government securities is the right choice.
Government Securities, also commonly known as G-Secs, is a category of debt instruments offered to the common masses by the government. These securities have a low-risk appetite and guarantee and a fixed income at regular intervals.
Like corporate funds are utilised by companies to fund operational expenses, purchase advancement equipment & technology, or expand their exteriors. Similarly, these securities are a way for the government to raise funds to carry out its activities. The state or the union government can fund military operations or expand the infrastructure, or cover other operational expenses through these.
In India, government securities are distributed in bills, treasury, bonds, or notes.
Let’s look at the different types of government securities in India to have a better understanding of them.
In India, there are different types of bonds and securities. Broadly the securities and bonds are Treasury Bills, State Development Loans, Cash Management Bills, Zero-coupon bonds, and many more. Here’s a detailed overview of the different types of government securities:
T-bills are government securities issued for a short term. These securities are money-market instruments. Thus, the maturity period is less than a year. In India, T-Bills are available to citizens in three maturity periods – 91 days, 182 days, and 364 days. Investing in such securities does not have any interest payments but is usually issued at a discount. This type of government security is very commonly used in India.
These are also known as Dated G-Secs, and are long-term in nature. These have a maturity life-cycle starting from 5 years and can go up to 40 years. Investors of this government security are called primary dealers. The various types of Dated G-Secs are Special Securities, Fixed Rate bonds, 75% Savings Bonds, STRIPS, and Capital Indexed Bonds.
This was launched in 2010 jointly by India and the RBI. It is a relatively new concept in the Indian financial market due to its less popularity. These are similar to T-bills with one significant difference. The maturity period for Cash Management Bills is less than 91 days or 3 months. Thus, these bills are called short-term government securities available to Indian investors. The government uses these securities to accelerate temporary cash-flow requirements.
These are issued by the state governments and are similar to dated G-Secs. States issue bonds and securities to meet or generate additional funds for an ongoing infrastructure or operational expense in the state. These can be issued at the auctions organised once every two weeks by the state Negotiation Dealing System. The repayment procedure and range of tenures are the same as the dated G-secs.
These are those government bonds with a fixed rate of interest. These are floated to the public on a tap basis as of December 29, 1997. The redemption is based on the Wholesale price index, giving the investors a hedge above the inflation in the country.
Bonds issued to the public at a discount on face value but redeemed at par are zero-coupon bonds. These were first issued on January 19, 1994. These bonds have a fixed maturity period. The difference between the discounted rate at face value and the redeemable amount at par acts as the return on investment.
These types of government securities are issued at par but repaid at regular intervals, maybe half-yearly. The interest rate is fixed, and security is redeemable at the bonds’ maturity date.
These are classified bonds that do not have a fixed coupon or rate. These coupons are set at regular intervals like every half-yearly by adding a margin on a base rate. For most of the floating-rate bonds issued by the government, the base rate represents the cut-off yield calculated as the weighted average for the prior three 364-day Treasury note auctions before the reset date. The auction determines the coupon and spread.
A year back, small investors had to invest in mutual funds or policies offered by life insurance companies to diversify their investments by buying government securities. The government and the Reserve Bank of India (RBI) took initiatives to attract direct investments.
And finally, the RBI announced in February 2021 that individual investors would be able to buy and sell government securities directly on its platform. An investor can bid in these securities auctions and buy them in the secondary market through the RBI’s Retail Direct scheme. These auctions would take place through their Demat accounts.
The Government of India and the RBI have initiated many ways an individual can purchase and invest in government securities. Primarily, the RBI organises auctions twice in two weeks. Interested investors can participate in Non-competitive Bidding or Competitive Bidding based on their eligibility. Banks, mutual funds, and insurance firms can invest through competitive bidding. The Government of India and the RBI began non-competitive bidding in 2017 for government bonds like treasury bills, SDL, etc., to encourage individual or retail investments.
Retail investors can purchase government securities through primary and secondary markets. This can be done by initiating a gilt account with the national banks.
A gilt account is like a regular bank account in any designated bank in India. The only difference is that instead of money, any gilt account conducts transactions in treasury bills, SDL, or other forms of government securities. These non-competitive bidding forms encourage retail investment of G-secs and allow the opening of new and safer forms of investments.
Purchasing different types of government bonds in India may have various advantages and disadvantages. Let’s look at some of them –
The Bottom Line:
Thus, investing in government securities is an excellent opportunity to invest your hard-earned money as it is secure and generates fixed returns. If you are not a big-shot investor and prefer a low-risk game, investing in government securities would be the right choice for you. A diversified portfolio is essential for financial security and stability.
It is wise to invest in different types of government bonds and securities. However, if one intends to build a balanced portfolio, keeping in mind their goals and risk appetite, one should consult a financial advisor. You can contact financial advisors through various digital platforms. You can discuss your investment goals and choices with them and make the right decisions.
Every week, the stock exchanges open a non-competitive bidding window for Government Securities. You can purchase these securities using your Demat account, and the amount will be deducted from the same. The treasury bill bids are taken Monday through Tuesday, and Bond bids are accepted Tuesday through Thursday. Upon successful allotment, the Government Securities will be credited to your Demat account, and all interest and maturity proceeds will be credited to your bank account.
Government bonds are traded on exchanges, and investors can sell them like stocks. T-bills haven't been listed yet. Hence, they cannot be sold before maturity. The Indian government guarantees coupon (interest payment) on all its securities. However, if you want to sell the securities before maturity, the price may differ from what you paid when you bought them.
Government bonds are traded on exchanges, and investors can sell them like stocks. T-bills haven't been listed yet. Hence, they cannot be sold before maturity. The Indian government guarantees coupon (interest payment) on all its securities. However, if you want to sell the securities before maturity, the price may differ from what you paid when you bought them.
The Reserve Bank of India (RBI) holds auctions to issue government securities. Auctions are held on the NDS, an electronic platform. This electronic platform includes commercial banks, scheduled urban co-operative banks, primary dealers, insurance firms, and provident funds that maintain fund accounts (current accounts) and securities accounts (SGL accounts) with RBI.
Commercial banks, primary dealers, and institutional investors, such as insurance firms, are critical players in the government securities market. Co-operative banks, regional rural banks, mutual funds, provident and pension funds are among the other participants. Foreign Institutional Investors (FIIs) are permitted to invest in the government securities market, subject to the quantitative limits. Government securities are also bought and sold by corporations to control their total portfolio risk.
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