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Government securities are one of the most common investment options. They are popular because they are issued by the government for various reasons, such as building roads, infrastructure projects, and expenditure, etc. Since these are issued by the government, they carry low risk as compared to other securities.
Government securities enable investors to build their income corpus as well as safeguard their hard-earned money from the risk factor associated with high-risk instruments.
There are various government securities issued with different maturities, yields, issuance, and objectives.
This article talks about various government securities which investors should know.
Key Takeaways
- Government securities are usually regarded as being less risky since they are backed by the central/state government.
- Different varieties of government securities exist; these include treasury bills, government bonds, cash management bills, SDLs, sovereign gold bonds, and floating rate bonds.
- An investor may decide what kind of government security to buy based on their financial objective, time horizon, income objective, and risk appetite.
- There is no guarantee that government securities are always safe. Investors need to take into account interest rate risk, inflation risk, and liquidity risk.
- Government securities can help diversify a portfolio by providing an alternative to higher-risk investments such as equities.
Treasury Bills
Treasury Bills are usually referred to as T-Bills. These are short-term government bonds issued by the Central Government to cover its temporary or short-term financial needs.
The Treasury Bills usually have three types of maturity periods: 91 days, 182 days, and 364 days. T-Bills differ from other securities in the sense that they do not offer any interest. They are issued at a lower price compared to their face value and then paid back at the face value on maturity.
For instance, let us consider a situation where the face value of a T-Bill is ₹100, and it is issued at ₹98. The buyer invests ₹98 in the T-Bill and earns ₹100 at the time of maturity.
In this case, the difference of ₹2 is the profit of the investor. T-Bills are popular investments among investors seeking a relatively safe short-term investment avenue.
Government Bonds
Government bonds, also known as dated government securities, are issued for longer maturities. The maturity period may be a few years up to a few decades.
These are different from Treasury Bills because they normally pay interest periodically. The rate of interest is called the coupon rate.
If a government bond carries a face value of ₹1,000 and has a coupon rate of 7%, an investor will earn ₹70 each year as interest. These instruments help investors earn periodic returns and hold their investments for a longer period of time.
The features of bonds can differ. There may be some bonds that give a fixed interest rate, whereas there may be some which have specific designs for certain investment purposes.
State Development Loans
The state governments require finance for development projects as well as for handling their financial needs. They raise finances through the issuance of securities called State Development Loans (SDLs).
State Development Loans are issued by individual state governments. They are long-term securities that pay interest payments on a regular basis.
An SDL can be issued by a state government with a maturity period of 10 years and a fixed interest rate. The buyers of the securities earn interest payments and the principal amount after the maturity of the securities.
SDLs are relatively safe since they are issued by state governments.
Floating Rate Bonds
While most government bonds are traditionally known to pay a fixed interest rate, Floating Rate Bonds can pay an interest rate that varies depending on the pre-set benchmark or formula.
The interest rate could be pegged to an interest rate prevailing in the market. In case there is any change in the benchmark rate, the interest payable on the bond will also vary accordingly.
If the interest rates are expected to increase, then floating rate bonds can be of great advantage to investors since the interest will increase too. The returns from this type of bond do not guarantee fixed interest payments like the traditional government bond.
Zero-Coupon Bonds
The zero coupon bonds are those bonds which do not make periodic payments to the investor. They are sold at a discount in relation to their face value and the bondholder gets the face value when the bond is redeemed at maturity.
An investor could buy a bond worth ₹800 and get ₹1,000 when the bond matures. Here, the ₹200 difference will be the profit that the investor receives.
Such bonds are helpful to investors who want to receive higher payment but do not require any payments regularly. These bonds are dependent on government borrowing schemes.
How to Invest in Government Securities?
Government securities are now more accessible to individual investors than ever before. Investors can go through various avenues to buy the government securities of their choice according to their needs and preferences.
A few methods of investing in government securities by individual investors are as follows:
- One of the easiest ways to invest in government securities is via the RBI Retail Direct portal. Under this method, the individual investor can directly open an account with the RBI in the government securities market and buy any of the following instruments:
- Treasury Bills
- Government Bonds
- State Development Loans
The government securities can be bought from a bank, stock broker, or any other authorized entity based on the instrument and investment option available. Certain government securities can be bought from the stock exchange too.
Before buying any government securities, individual investors must understand the tenure, rate of interest, minimum investment, liquidity, and taxability of the security. They should also decide if they are looking for a steady income from the security or want to receive the entire amount upon maturity.
Conclusion
Government securities play a crucial role in the Indian financial system and give investors different options depending on their investment horizon. Treasury Bills are ideal for short-term investments, whereas government bonds and state development loans can be considered for long-term investments.
The cash management bills are useful for meeting the short-term cash management requirements of the government, whereas there are specific securities like sovereign gold bonds and inflation-indexed bonds. The major advantage of government securities lies in the low credit risk and diverse maturity period and structures.
