Government securities are tradable fixed-income investment options that are issued to fund the government’s operational costs. There are numerous variants of government securities. Keep reading to learn all about them.
What Are Government Securities?
Government securities, popularly known as G-Secs, are investment products that are issued by the Central Government and state governments. Governments issue these securities to raise capital from the general public. These bonds ensure emergency funding for operational purposes. If you invest in such fixed-income securities, you can earn regular interest income.
Interest payment is done on the basis of the coupon rate specified in the government bond contract. As these investment instruments receive the backing of the government, the risk associated is negligible. Government bonds also include a promise to repay the principal amount (amount invested) to the bondholder at the end of maturity period.
Initially, governments issued G-secs for only large financial entities like large companies, commercial banks or high-net-worth investors. However, nowadays governments also offer G-secs to smaller investors like cooperative banks and individual investors.
Government Securities Market
In India, government securities are auctioned by the Reserve Bank of India which allows bidding on the basis of yield or price. This auction takes place in the primary market where Central and state governments, banks, financial institutions and insurance companies issue various types of government securities.
The auction of government securities is quite similar to applying for an IPO. Once the bidding is complete, the government security gets listed on the exchange. You have the option of either selling it whenever you want or trading it once it gets listed. To facilitate easier access and wider participation in the government security market, SEBI also allows buying and selling of government securities through stock exchanges.
Government Securities Examples
As an investor, you can buy government bonds directly from the market. There are two different ways you can buy government bonds. One is by investing via GILT mutual fund and another is by creating a demat account.
- Gilt mutual funds is a type of debt fund that invests in government securities. Therefore, it is one of the best ways to invest in government securities.
- Additionally, you can also invest in government securities if you own a demat account. In case you do not have one, you can open one by contacting a bank or NBFC of your choice.
You can log in to your demat account and invest in a number of government securities. For this, you simply need to place a buy order for government bonds on the stock exchange.
Also, you can invest in government bonds from stockbrokers by participating in non-competitive bidding. Exchanges open a non-competitive bidding window every week for G-secs. Bids for T-Bills start on Monday and continues till Tuesday. For bonds, bidding starts on Tuesday and ends on Thursday.
Retail investors may place bids on goBID web portal of NSE or goBID mobile application of NSE. In order to participate in this auction, you will need a current account or subsidiary general ledger account. However, you need to note that yield will be determined on the basis of bids received from investors.
Types of Government Securities
There are a variety of government securities offered by the Reserve Bank of India and state government bodies. Let us take a look at them:
- Treasury Bills
Also known as T-Bills, these short-term investment instruments come in three variations, 91 days, 182 days and 364 days. T-Bills do not offer any interest; however, the government issues them at a discounted rate. When you redeem them, you get them at the face value. RBI auctions T-Bills every week or fortnight.
- Cash Management Bills (CMBs)
Cash management bills were introduced in the year 2010. They are quite similar to T-Bills as they are short-term; however, their maturity period is less than 91 days. CMBs generally fulfil temporary cash flow requirements of the government.
- Dated Government Securities
These securities either have fixed or floating interest rates. They are long-term investment instruments with tenures ranging from 5 to 40 years. People who invest in dated government securities are known as primary dealers. The Government of India issues a wide variety of dated government securities that include capital-indexed bonds, special securities, STRIPs etc.
- State Development Loans
State development loans are similar to dated government securities but are issued by the state government instead of the Central Government. Auctions for these take place every two weeks. These securities offer a higher interest rate in comparison to dated government securities.
- Treasury Inflation-Protected Securities (TIPs)
TIPs are available for a tenure of 5, 10 or 30 years. They are quite similar to conventional treasury bonds; however, the only difference is the dynamic principal issued to keep up with inflation. These securities offer interest every six months and the rates change once every year in case of rising inflation.
- Zero-Coupon Bonds
These securities are quite similar to T-Bills as you can invest in them at a discounted rate. They do not offer any coupon rate or interest rate. You can redeem this security at face value.
- Capital Indexed Bonds
In case of capital indexed bonds, rate of interest is calculated as a fixed percentage over the wholesale price index. This offers investors effective protection against inflation.
- Floating Rate Bonds
Floating rate bonds do not come with a fixed interest or coupon rate; the interest income changes as per the prevailing market conditions. These might be a good investment option for people who wish to protect their portfolio from any type of risk.
Final Word
Government securities form a vital part of the economy and are equally beneficial for investors and the government. They offer a great way to diversify your portfolio as they are safe and reliable.
