Decoding G-Sec vs. FD

In the realm of investment options, the choice between Government Securities (G-Sec) and Fixed Deposits (FD) can be confusing. To simplify this decision-making process, Ashish Nanda, Joint President at Kotak Securities, explores the risks associated with both instruments in this thought-provoking article.
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The art of prudent investing calls for a judicious evaluation of available options, and the perennial G-Sec vs. FD debate continues to captivate investors seeking optimal strategies. In this distinguished thought leadership article, we strive to unravel the intricacies of these investments by dissecting the risks they entail. Our aim is to equip discerning readers with the knowledge and acumen necessary to make sound financial choices.

Default risk (G-Sec: 9.9/10, FD: 9/10): G-Sec Wins

G-Secs have the lowest default risk of any investment. This is because they are sovereign in nature and there is very little to nil possibility of defaulting on the payment. FDs also have a very low default risk, as the Deposit Insurance and Credit Guarantee Corporation (DICGC) insure it. However, large public and private banks are considered safer in this regard. The DICGC also insures up to ₹5 Lakh per depositor per bank, so, if you have more than ₹5 Lakh invested in FDs, you are exposed to some default risk.

Liquidity risk (G-Sec: 4/10, FD: 9/10):

While G secs can be traded in the secondary market, they continue to be highly illiquid on any exchange platform. This makes them high risk in the category of liquidity. On the other hand, FD’s have a shorter maturity and thus, scores better for liquidity risk.

Interest rate risk (G-Sec: 5/10, FD: 9/10): FD Wins

Considering that G-Secs have longer maturities, any loss of value can be a steep hit. When interest rates fall, it is best to hold onto longer maturity G-Sec’s. Contrastingly, when interest rates are high, it is better to hold shorter maturity G-Sec’s. FDs are simpler, as they have a shorter maturity in general. While it is still exposed to interest risk, FDs can be payed-off with penalty and rebooked, and hence, has a lower interest risk. Unlike G-Secs, FDs have minimal interest rate/MTM risk, as they are not traded. There is no MTM impact on the principal, unlike GSEC. Any penalty on FDs can only be on the interest and never on the principal.

Haircut (G-Sec: 8/10, FD: 10/10): FD Wins

A haircut is an amount that is deducted from the market value of a security when it is used as collateral. G-Secs have a haircut of 5-10%, depending on liquidity. FDs do not have a haircut.

Interest paid when used as collateral (G-Sec: 10/10, FD: 7/10): G-Sec Wins

Using G-Sec or FD as collateral for Intraday trading, warrants no interest on the exposure. However, G-Sec is advantageous when used as a collateral for Positional trades, because it can be considered as cash collateral and no interest is applicable here. FD on the other hand, cannot be considered as cash or non-cash collateral and may have applicable interest.

  • G-Secs and FDs are both low-risk investments, but they have different risk profiles.
  • G-Secs have lower default risk, but higher liquidity and interest rate risk.
  • FDs have lower liquidity risk, as well as lower interest rate risk.

The best investment for you will depend on your individual risk tolerance and investment goals. If you are looking for an investment with the lowest possible default risk, then G-Secs are a good choice. If you are looking for an investment with high liquidity, then FDs are a good choice.

It is important to note that these are just general guidelines. The specific risk profile of a G-Sec or FD will depend on the specific security. You should always do your own research before investing.

In addition to the factors mentioned above, there are a few other things to consider when choosing between G-Secs and FDs:

  • Taxation: The taxation of G-Secs and FDs are slightly different. Interest on both, FDs and Gsec’s, are taxed as marginal income. However, for Gsec’s traded on exchange, the change in price and unpaid interest is taxed as Capital Gain
  • Maturity date: G-Secs and FDs come with different maturity dates. G-Secs have a wider range of maturity dates, while FDs typically have shorter maturity dates.
  • Risk appetite: Both G-Secs and FDs are extremely low-risk options.
  • Interest rate: While interest rate in both the instruments are fixed till maturity. Gsec’s carry a higher interest rate/MTM risk than FD’s. As Gsec’s are traded, any adverse movement of interest rate can impact the GSEC price and therefore capital. The risk gets nullified if the Gsec is held to maturity. However, since FD’s are not traded, the principal is immune to interest rate risk.

Ultimately, the best way to decide between G-Secs and FDs is to consider your individual circumstances and goals. If you are not sure which investment is right for you, you should consult with a financial advisor.

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