Dated Government Securities: Introduction, Types, and Role of RBI
While exploring debt investment instruments for diversifying the investment portfolio, you must have come across government securities or bonds. These bonds fall under the category of safe investment instruments as they are backed by the government and offer guaranteed returns. When the government releases securities with a predetermined maturity period, they are called dated government securities.
If you are starting your investment journey and looking for a long-term investment with regular and guaranteed returns, you can explore different government securities and invest.
Let us get acquainted with the basics of dated government securities, and learn about their meaning, types, and the crucial role of governing bodies.
What are Government Securities?
Government securities are the debt investment instruments issued by government authorities. The Central and the State Governments of India issue various government securities in the form of treasury bills, cash management bills, and municipal bonds, to raise funds for ongoing or upcoming projects, infrastructure development activities, military projects, and other plans.
When you invest in these securities, the government pays interest on a regular basis throughout the tenure and repays the principal amount. The Reserve Bank of India (RBI) regulates government securities. Owing to the government’s backing, the risk involved in these bonds investment is almost negligible. So, these bonds are one of the safest investment instruments.
Introduction to Dated Government Securities
Dated government securities are securities or bonds issued by the Government of India across a range of tenure. The tenure ranges from five years to 40 years. Dated securities are so named as the date of maturity is expressed explicitly in these securities. Also, the interest rate might be expressed as the coupon rate in these securities. The coupon rate (interest rate) can be fixed or floating – it varies for different securities and gets paid on the face value on a half-yearly basis.
The RBI has a registry of the Government of India dated securities. It has authority over issuance of such dated securities, making coupon payments, and repaying the principal amount on the maturity date.
The coupon rate is mentioned explicitly in these securities and bonds, and it generally varies for each financial year. For instance, in the financial year 2020- 21 the interest rate ranged from 3.79% to 7.19% for securities issued by the Central Government with weighted average interest rate of 5.80%, and for the SDLs issued by the State Governments, the interest rate ranged from 4.15% to 8.96% with weighted average interest rate of 6.55%.
Dated government securities can be purchased and sold in the active secondary market through stock exchanges, over-the-counter (OTC), Negotiated Dealing System-Order Matching (NDS-OM), and NDS-OM-Web. These securities can be used to build a diversified investment portfolio.
Types of Dated Government Securities
Following are some of the types of dated government securities:
Fixed Rate Bonds
These bonds have a fixed coupon rate. The coupon rate remains the same throughout the tenure.
Floating Rate Bonds
These bonds do not have a fixed coupon rate. They have a variable couple rate. The coupon rate gets reset on the pre-announced intervals, generally half-yearly or yearly.
Zero Coupon Bonds
Zero coupon bonds do not have a coupon rate. They are offered at a discounted value and redeemed at face value. So, the difference between the discounted value and the face value is the return earned by the bondholder.
Capital Index Bonds
The coupon rate of these bonds gets fixed over the acceptable inflation index. The principal amount or face value stays protected against inflation for the bondholders.
Inflation Indexed Bonds
In Inflation Indexed Bonds, the principal amount as well as the interest payment is linked to an inflation index.The inflation could either be the Consumer Price Index (CPI) or the Wholesale Price Index (WPI). For bondholders, this protects the principal amount and coupon flows against inflation.
Bonds with Call/Put Options
These bonds come with call-and-put options. In the call option, the issuer can repurchase the bond from the investor. While in the put option, the investor can put the bond on sale for the issuer. Both of these options can be exercised during the currency of the bond, after completion of five years from the date of issuance on any coupon date falling thereafter. Under this category, some bonds can have either of these options, while some bonds have both the options.
These securities are offered to oil marketing companies (oil bonds), fertiliser companies (fertiliser bonds), and food companies (food bonds) as compensation for cash subsidies. The Government of India issues these securities from time to time. They usually have a higher coupon rate and are long-dated. The beneficiary entities may divest these securities in the secondary market to banks, insurance companies / Primary Dealers, etc., for raising funds.
Separate Trading of Registered Interest and Principal of Securities (STRIPS) are securities developed to separate the cash flows related to regular government securities. They are created to separate the payments, i.e., half-yearly coupon payments and the principal amount payments into separate securities which investors can hold and trade individually. They are usually similar to zero coupon bonds but are created out of existing securities and unlike other securities, are not issued through auction.
7.75% Savings (Taxable) Bonds
As mentioned in the nomenclature, the interest for this bond is 7.75%. The Government of India rolled out these bonds in 2018. Any individual can buy these bonds in an individual capacity, on a joint basis, on a survivor basis, or as a minor buying under the guidance of a parent or legal guardian. A Hindu Undivided Family (HUF) can also purchase these bonds. The interest generated on these bonds is taxable under the Income Tax Act, 1961.
Sovereign Gold Bonds
The government issues these bonds for investors who want to invest in gold, but do not physically own it. These bonds are among the safest investment options with fixed interest rates, customisable investment size, and security by RBI. The bonds have a maturity period of eight years, but premature redemption is permitted after the fifth year of the date of issue. The prices of these bonds are linked to commodity price viz Gold. The Bonds shall be denominated in units of one gram of gold and multiples thereof.
Role of RBI in Issuing Dated Securities
The RBI issues the dated securities on behalf of the Government of India. Moreover, the RBI is responsible for paying the coupon amount on a half-yearly basis and the principal amount upon maturity. The Public Debt Office (PDO) of the RBI deals with the activities related to dated government securities. The RBI carries out an auction through the Negotiated Dealing System (NDS) to sell these securities.
Who should invest in government bonds?
- If you want to diversify your investment portfolio and invest in low-risk schemes, then government bonds are one of the best options. As the RBI issues them on behalf of the government, the risk of default on repayment is negligible. So, you can opt for government bonds to mitigate risks in your investment portfolio.
- If you want to begin a new venture after ten years and already have a surplus amount in your bank account, you can invest in government bonds. You will have the amount at your disposal after ten years, along with the interest amount.
Dated government securities are debt instruments issued by the government that offer investment options with a long-term maturity period. There are different types of securities and bonds, and they are under the control of the RBI. So if you are looking for a low-risk investment option, dated G-secs can be a good addition to your investment portfolio.
FAQs related to Dated Government Securities
What are tax-free bonds?
Tax-free bonds are bonds issued by government authorities and agencies to finance projects. These bonds provide tax exemption on the interest generated from the investment as per the Income Tax Act of India, 1961.
What are capital gain bonds?
Capital gain bonds enable you to save tax on long-term capital gains. These bonds give tax exemption based on Section 54EC of the Income Tax Act, 1961.
How can I buy government bonds?
You can buy government bonds in three ways: (a) through an online process called non-competitive bidding, (b) From the issuer’s official website by making online purchases and submitting KYC documents, and (c) through secondary markets. The government recently launched a platform—RBI Retail Direct Gilt Account— that allows retail investors to buy and sell government securities on their own.
What is the difference between T-bills and government bonds?
T-bills, also known as treasury bills, are short-term money market instruments issued by the Government of India. The maturity period varies from 91 days to 364 days. However, government bonds are long-term instruments issued by the Government of India wherein the maturity period varies from 5 years to 40 years.