Governments need funds for various expenses, such as infrastructural development and public subsidies, among others. While taxation is a significant source of revenue, the government needs to borrow funds, both to meet short-term liquidity mismatches and long-term expenditures. Therefore, it issues different types of government securities abbreviated as G-secs to raise funds from the public.
G-secs are a liquid & fungible medium for capital mobilisation. They usually take the form of fixed income securities and come in a range of variations. Being guaranteed by the sovereign, they are practically risk-free. The G-secs are also referred to as “gilt-edged securities.” The term gilt-edged securities originates from one of the earliest securities issued by the British government, printed on paper with gilded edges.
The Reserve Bank of India (RBI) issues G-secs on behalf of the government. You can invest in them directly via the RBI Retail Direct portal or by registering on the NSE goBID app. You can also invest in them through your Demat account. However, before investing, it is prudent for you to analyse their innate risk-return characteristics and tally the same with your investment goals & constraints. Keep reading to learn more about what G-sec is, its types, and the pros and cons of investing in government securities.
What are Government Securities?
Government securities are tradable instruments recognising the government’s obligation to repay debt at a specified maturity date. The principal to be repaid is predetermined and is referred to as the “face value” of the security.
The government of India issues two types of G-secs:
- Short-term – with a maturity of less than one year, referred to as Treasury Bills.
- Long-term – with a maturity greater than one year, popularly identified as Government Bonds.
The state governments in India do not issue short-term securities and they raise funds from the public only through long-term instruments.
Types of Government Securities in India
Let’s understand the various types of G-sec bonds available for investors in India:
Treasury bills (T-bills)
Treasury bills are government securities with a maturity period of less than a year. T-Bills with the following tenures are available in India:
These bills do not pay any coupons. The only return you will get from investing in them is the difference between the issue price and the face value at redemption. They are basically issued at discount and redeemed at Face Value. The difference between the issue price and the redemption price is the implied interest rate. For instance, if you buy a T-bill with a face value of 100 and a discounted issue price of Rs. 98.3, your return will be 100-98.3= 1.7Rs.
The RBI auctions T-bills of 91-day maturity every Friday and those with 182-day and 364-day maturity every alternate Wednesday.
Cash management bills
Cash management bills were issued for the first time in India in 2010. Their features are similar to Treasury Bills, but their maturity is less than 91 days. They are not issued periodically like T-bills but only to manage the temporary mismatches in the government’s cash flow.
As the name suggests, dated G-secs come with a fixed maturity date. These are long-term G-sec bonds with a fixed or floating interest rate paid semi-annually. The term usually ranges from 5-40 years. Their nomenclature contains the coupon rate followed by the issuer followed by the maturity year. For instance, “7.17% GS 2028” stands for a bond paying a G-sec rate of 7.17%, issued by the Government of India and maturing in 2028.
There are multiple kinds of dated G-secs:
- Based on whether these securities pay fixed or floating rates of interest, they are classified into fixed rate bonds and floating-rate bonds. When these securities do not pay a coupon and sell at a discount, they are called “zero coupon bonds.”
- Some dated securities have their principal amount or interest linked to an index like the Wholesale Price Index (WPI) or Consumer Price Index (CPI). This indexing ensures that inflation does not erode your invested capital or total returns. Based on whether only the principal is indexed or both principal and interest payments are indexed, dated securities are classified into capital-indexed bonds and inflation index bonds.
- Some dated securities come with a built-in call or put option. Based on these, government bonds are categorised into callable and putable bonds. Callable bonds can be repurchased by the issuer at face value at some designated time before maturity. Similarly, putable bonds can be sold by the investor to the government at face value before maturity at a pre-specified time.
State development loans
State governments issue securities, called “state development loans.” They also come with a fixed maturity date, semi-annual coupon payments, and a final principal repayment called face value at maturity. The RBI helps with their issues through the Negotiated Dealing System.
Who Should Invest in G-Secs?
G-secs are regarded as one of the most reliable instruments of investment in a country. Therefore, if you are averse to taking any risk and want to build a corpus while earning consistent returns on investment in a relatively safer way, you should invest in government bonds in India. Investing in them has become very convenient as the RBI is making efforts to make G-secs more accessible to the public.
Also, if you are a new investor, you can build your corpus by starting with government securities as you learn more about investing. You can use G-secs of different maturities to ladder your investments and meet your risk and liquidity requirements.
Advantages of Investing in Government Securities
Here are the advantages of investing in government securities:
Being guaranteed by the government, these securities are nearly default-free. So, your principal and coupon payments are guaranteed and free of risk.
Inflation-indexed bonds have provisions to adjust the principal and the interest amount in accordance with the inflation index’s movement to ensure real returns. Similarly, capital index bonds have the principal amount adjusted per an inflation index to prevent the capital from reducing in value due to inflation.
Investing in these, therefore, gives you an edge over other nominal return-giving instruments.
Government securities are one of the most liquid instruments in the country, and you can even pledge them to avail loans. Financial institutions can use these bonds to fulfil their Statutory Liquidity Requirements (SLR).
You can use government securities to diversify the risk of your portfolio. By being risk-free, they reduce the overall risk exposure of the portfolio.
Regular coupon payments made by the G-sec issuer serve as a source of regular income for those who need one. Retired people and others without a stable income source, such as freelancers, salespeople, etc., can invest in these bonds to ensure financial stability.
Disadvantages to Investing in Government Securities
There are some disadvantages to investing in government securities. Let’s understand them:
The return on government securities is less competitive than corporate bonds or equity instruments.
Interest rate risk
Dated securities have a long-term maturity of 5-40 years. Therefore, they become exposed to interest rate risk, i.e., when the interest rates increase during the bond’s tenure, it becomes more beneficial to invest in newer bonds than the current one. As a result, the bond prices drop to match the yield of the newer bonds.
In a nutshell, the government issues G-secs to raise debt, and you can invest in these G-secs to earn a pre-set risk-adjusted return. The returns on government securities are practically guaranteed with negligible risk. They are a haven for risk-averse investors and can be used in combination with other instruments. It is however prudent for you to select G-secs that match your investment goals.
Who can buy government securities in India?
Individuals, HUF, trusts, companies, mutual funds, financial institutions, etc., can all buy government securities in India. NRIs are also eligible to invest in them.
How do you trade in government securities?
You can trade in government securities through your Demat account with a broker. You can also do so directly at the RBI Retail Direct portal. There is also an option to trade at the exchange by registering at the NSE boBID portal by registering with your Demat account.
Are government securities a good investment?
Government securities are a good investment offering risk-free returns. Dated securities come with regular coupon payments, which is a steady income stream. However, whether an instrument is a good investment for you depends on your financial goals. If you seek very high returns by taking relatively higher risks, government bonds may not be what you are looking for.
What is a municipal bond?
Municipal bonds are securities issued by municipal governments/ local government bodies to raise funds for specific projects. Their returns are usually guaranteed by regular cash flows, such as toll collection proceeds in the case of a bond issued to raise funds for road development. They are called “muni bonds,” in short.
How can I buy government bonds?
As retail investors, you can buy government bonds directly from exchanges through the application – NSE goBID. You have to register for this app and link your account to your Demat account.
You can also buy government bonds on the RBI Retail Direct platform.