Government Securities-Everything You Wanted to Know

Imagine you are in need of substantial funds to address a certain need of your family and do not have any immediate savings or liquidity to bank on. What are your options? Taking a loan from friends, family or financial institutions and paying interest on it.

Now multiply that need for a government, which requires funds to run an entire country, which can easily run into crores of rupees. What does it do? It raises money from the public, you and me, through government securities. If you are wondering what government securities are, their types and how to invest in them, read on.

What are Government Securities?

Government securities are debt instruments issued by the government to raise money to meet various expenses. When you invest in government securities, you essentially lend money to the government.

Yes, similarly to your friend, relative or a financial institution lending to you. Now, every lending bears an interest, and it’s the same with government securities. The government offers you interest in the securities you invest in. Government securities are popularly known as G-Secs.

How Government Securities Work?

Now that you know what government securities are, let us understand how they work. Government securities work like bank fixed deposits. When you invest in a fixed deposit, you lend the bank a certain amount of money.

The bank pays you an interest on your deposit. The bank uses your money to lend to other customers. However, in the case of government securities, the government uses the money to meet its fiscal expenditure.

Types of Government Securities in India

When it comes to government securities, options galore. However, the most popular ones are:

• Government bonds
  
• Treasury bills
  

Let us understand each one of them in detail.

What are Government Bonds?

Government bonds are one of the most popular types of government securities available for investment. The state and central governments can both issue them. The tenure or maturity of such bonds can range from 91 days to 40 years. (RBI) There are primarily two types of government bonds – fixed-rate bonds and floating-rate bonds.

In fixed-rate bonds, the interest rate remains the same throughout the bond tenure. On the other hand, in the case of floating rate bonds, the interest rate isn’t fixed and keeps fluctuating.

What is a Treasury Bill?

Treasury bills, commonly known as T-bills, are another type of government security issued by the Indian government. T-bills are issued in three tenors – 91 days, 182 days and 364 days. (RBI) However, here is a catch. Unlike government bonds, T-bills are zero-coupon securities. It means you do not earn any interest on them like government bonds. So, how do you make money from T-bills?

T-bills are issued at a discount. These you can redeem at face value upon maturity. Let us understand it with an example. Suppose a 91-day T-bill of face value of ₹100 is issued at a discount of ₹95. Upon maturity, you redeem it at the face value of ₹100. The difference, ₹5, is your profit.

What are the Benefits of G-Secs?

Some of the major benefits you get while investing in G-Secs are:

• Security

This is the biggest benefit of investing in government securities. As they are backed by the government, they are more secure than market-linked products. In other words, the vagaries of the stock market do not generally affect government securities, thus helping you sleep peacefully. If you want capital safety and have a low risk tolerance, you can invest in government securities.

• Regular Income

Are you looking for a regular income from your investment? Well, government securities can help you earn that. You get a regular source of income through periodic payments from these securities. The periodic payments received from them can help you augment your income to some extent.

• Diversification

Remember, how elders advised not to keep all money at one place while travelling but distribute it. The little but smart move ensured that in the event of a theft, not all is lost. Investment is no different. A core investing principle, investing in government securities can help you diversify your portfolio. Portfolio diversification reduces investing risk and protects gains from eroding due to market fluctuations.

Risks Associated With Government Securities

Now, comes the part that you must take special note of. While government securities are safe, there are certain risks associated with them. Remember, no investment is risk-free. Some risks associated with government securities are as follows:

• Inflation Risk

Inflation, the real wealth damager, can erode real returns you earn from investing in government securities. For example, if the inflation rate is 6% and the returns you get is 5%, your real rate of return is -1%. Real returns are returns you get up and above inflation.

• Interest Rate Risk

This is another major risk. When interest rates rise, returns from G-secs, particularly government bonds, fall. This can significantly erode your profits.

How to Invest in Government Securities?

If you have made up your mind to invest in G-secs, there are several ways through which you can invest in them. These include:

• Through Stockbrokers

The easiest way to invest in G-Secs is through a registered stockbroker. Brokers offer non-competitive and auction-based processes through which you can acquire them.

• Through Mutual Funds

Mutual funds are another convenient option for investing in government securities. A mutual fund may invest in several types of government securities and bonds. This eliminates the need for investment in individual G-secs. However, make sure to review the fund's underlying portfolio before investing and make sure it aligns with your needs.

• Direct Investment

You can also invest in G-secs through platforms like RBI Retail Direct and NSE GoBid. You need to complete your registration and then invest in specific securities through a bidding process.

Conclusion

G-Secs serve the purpose for the government as well as investors. While they help the government to raise money for various needs, they give you assured returns on your investment. They can help you diversify your portfolio, and the government’s sovereign backing makes them a reliable investment option. They are a win-win proposition for both parties.

Invest in G-secs with Kotak Securities in just a few taps at your convenience. Explore G-Sec offers here.

Sources:

RBI
RBI