In February this year, the Reserve Bank of India (RBI) made an announcement, as per which, retail investors will now be able to directly buy government bonds and treasury bills. All that an investor will have to do for this is open a gilt securities account (Retail Direct) with the central bank. Here’s all you need to know about government securities.
What are government securities?
Government securities, also known as G-Secs, are debt instruments issued by the government. These securities are issued by:
- The Central government and
- The State governments of India.
These investment options generally offer a regular interest income to investors. Since these are backed by the government, the associated risk level is almost negligent.
Why does the government issue securities?
The Government of India issues securities to raise funds to finance its expenditure requirements and to manage its debt. These securities include bonds, treasury bills, and other marketable securities. The government uses the money raised from the sale of these securities to finance its budget deficits, infrastructure projects, and other expenses. In addition, issuing securities helps the government manage its debt by refinancing existing debt and reducing its interest costs. Overall, the issuance of securities by the government plays a vital role in managing the country’s finances and ensuring economic stability.
What are the different government securities available in India?
There is a range of government securities available in India for investors to choose from.
These can broadly be classified as:
- Treasury Bills (T-bills)
- Cash Management Bills (CMBs)
- Dated G-Secs
- State Development Loans (SDLs)
Here are the details:
Treasury bills (T-bills)
Treasury bills, also known as T-bills, are issued by the Central Government.
Features of T-bills:
- These are short-term money market instruments.
- The maturity period of these securities is under 1 year.
- Currently, T-bills are issued with three maturity periods:
- 91 days,
- 182 days, and
- 364 days.
T-bills are slightly different from other investment options in the financial markets, in that, while most investment options tend to pay interest on the investment, Treasury bills are zero coupon securities. Therefore, these securities do not pay any interest on the investment.
T-bills are issued at a discount and are redeemable at face value at maturity. For example, a 182-day T-bill that has a face value of Rs. 100 could be issued at Rs. 96. The discount here is of Rs. 4 and the instrument can be redeemed at the face value of Rs. 100.
Cash Management Bills (CMBs)
Cash Management Bills (CMBs) are newly introduced to the Indian securities market. These are zero-coupon securities similar to T-bills and were launched in 2010 by the government of India and the Reserve Bank of India.
Features of CMBs:
- Maturity period is under 91 days
- These are ultra-short-term investments
- Used by the government of India to strategically meet temporary cash flow needs
- Investors can use these securities to meet short-term financial goals
Dated G-Secs also forms part of government securities in India. These are long-term money market instruments offering a range of investment tenures.
Features of dated G-secs:
- Tenures start from 5 years up to 40 years.
- These offer a fixed or a floating interest rate/coupon rate.
- The coupon rate is applied on the instrument’s face value
- Coupon is paid on a half-yearly basis
There are approximately 9 types of dated G-Secs being issued by the Government of India. These are:
- Fixed Rate Bonds
- Floating Rate Bonds
- Inflation-Indexed Bonds
- Special Securities
- Capital Indexed Bonds
- 7.5% Savings (Taxable) Bonds, 2018
- Bonds with Call/Put Options
- Sovereign Gold Bonds
State Development Loans (SDLs)
As the name suggests, SDLs are issued by the state governments of India. These instruments help the state governments in funding their activities and meeting their budgetary needs.
Features of SDLs:
- These government securities are similar to dated G-Secs.
- Similar repayment method as G-secs
- Offer a wide range of investment tenures
The primary difference between dated G-secs and SLDs is that while dated G-Secs are issued by the central government, SDLs are issued by the state governments of India.
Did you know –
In a fascinating new development, the Government of India in Nov’21 made it possible for retail investors to start investing in Government Securities including treasury bills, state development loans, and sovereign gold bonds through an online account maintained with RBI.
Initiative to allow direct retail investment in government securities
The Government of India now allows direct retail investments in government securities.
With this, retail investors can access government bonds through both primary and secondary markets. These products were primarily available to banks and large financial institutions till recently. Now, even retail investors can invest in them and make the most of attractive and assured returns.
How can retail investors invest in government securities?
- Retail investors can trade in government securities through stock exchanges using online RBI platform
- They can participate in primary security issuances directly using their Retail Direct account
- Investors can bid in primary auctions to buy and sell securities
- No fee will be levied by RBI for any related service
- The transaction payments can be made by investors through internet-banking and also UPI facility
- Investors can avail support facility for this through phone, email or online
Why does retail investment in government securities matter?
Small investors are often on the look-out for safety with regards to their investments. As per RBI’s preliminary analysis carried out in 2020, nearly 56% of household savings are said to be invested in bank fixed deposits. This means most risk-averse investors are unable to fetch a decent return on their investments since bank FDs offer very low interest rates in today’s times.
For investors who prefer low-risk and fixed-income investment options, there are many government securities available in India. These come with exceptionally low risk and they also provide the advantage of guaranteed returns.
Government securities (G-Sec), for instance, offer a high level of safety through risk-free rate of return. Therefore, investing in these can offer both safety and guaranteed investment returns. But, the interest earned on all these securities are taxable as per the slab rate of the investor.
Since there are a variety of government securities available in India, it’s easy for investors to choose some of the best alternatives for your investment portfolio. Apart from offering guaranteed income or returns, investments in government securities can also help investors to balance the risk factor in their overall investment portfolio.
Currently, there is no clarity on the cost aspect of selling government securities in the secondary market. Experts estimate that there could be associated brokerage and exchange-related costs. Also, investors may have to pay capital gains tax while selling securities in the secondary market, depending on the holding period.
Dated G-secs offer tenures starting from 5 years. However, other government securities, such as treasury bills, are mainly short-term investment avenues.
Government securities are a good investment from a safety aspect since these are risk free and backed by the government. However, these may offer lower interest rates as compared to other investments that come with higher risk levels.
Government securities are issued by the government, however, bonds are not necessarily issued by the government. These can be issued by corporates and banks too.
Retail investors can invest in G-secs through auctions conducted by commercial banks, on stock exchanges, for example, BSE direct, on broking platforms, through mutual funds, and also through RBI’s electronic auction platform.