In the investment realm, government security applies to an array of investment products facilitated by a governmental body. The government of many countries rolled out these debt instruments to funds necessary operations. For most readers, the most common security is those items issued by the Reserve Bank in the form of notes, bills, and treasury bonds. Adding up Government securities in your investment portfolio will give you a sense a relief owing to their stable nature.
Key takeaway:
On Feb 5, 2021, RBI came up with an announcement that enables small investors to access government securities trading platforms. Retail investors have the right to open their gilt account with Reserve Bank and trade-in g-secs. The decision was nothing short of a major structural reform.
The g-sec market is ruled by banks, mutual funds, and insurance companies. These establishments trade in a portfolio of Rs 5 crore and above.
Therefore, there is an absence of liquidity in the secondary market for small investors who prefer trading with smaller investment portfolios. Simply put, these investors struggle to exits from their investments. Therefore, direct g-secs trading has still a long way to go before it becomes popular among retail investors.
Importance of Government Securities in a Business landscape
Government securities ensure full repayment of invested principal at maturity of the security. Some government securities might also pay interest payments or periodic coupons. These securities are treated as a conservative investment having a low-risk profile and complete backing of the government[1] that issued them.
Every investor comes with different investment capabilities and immunity to endure risk. While some investors favor high-risk-high-reward investments, others are more inclined towards low-risk, fixed-income investment options.
Fortunately, there are a plethora of government securities options available for risk-conscious investors.
Such options carry minimal risk and come with an assurance of assured returns on investment. Today, investors with low-risk tolerance have access to a wide range of government securities.
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Common forms of Government Security in India
Have a glance over the most widely issued government securities
Savings Bonds
Saving bonds render a fixed rate of interest over the term of the product. If the investor holds such a bond till maturity then they will receive the face value of the bond plus and accrued interest based on the fixed rate of interest. Once purchase, such a bond cannot be redeemed for the first year it is held. In case the owner redeems the saving bond within the first five years then he will stand ineligible to avail months of accrued interest.
T-Bills
Treasury bills or T-bills are disbursed by the Central Government. They are also regarded as a short-term money market instruments, which indicates that their maturity timeline is less than 1 year. Treasury bills come with a flexible maturity periods: 91 days, 182 days, & 364 days. T-bills are quite distinct when contrasted with other kinds of investment products.
Most debt instruments pay you interest on your investment. Treasury bill is also known as zero-coupon securities. These securities do not accrue any interest on the investment. But, they are dispensed at a discount and are redeemed at face value on the maturity’s date. For ex: a 182-day T-bill having Rs. 100 of face value may be disbursed at Rs 96, with a discount of Rs 4, & redeemed at Rs 100 of face value.
Treasury Notes
Treasury notes (aka T-Notes) usually come with 2, 3, 5, or 10 years of maturities. They are often regarded as them intermediate-term bonds. These notes pay an interest payment semi-annually or fixed-rate coupon. The face value of such a bond is directly proportional to the length of the maturity period. Yields on T-Note aren’t stable and it alters daily.
Treasury Bonds
Treasury bonds(aka T-Bonds) come with a wide bandwidth of maturity period that ranges from 10-30 years. These investments have optimal face values and pay interest returns on a semi-annual basis. The government leverage such binds to counter deficits of their balance sheet. Also, as mentioned above, the RBI regulates the fund supply and rate of interest via the buying & selling of such bonds.
Pros of Government securities
- Government securities can underpin a reliable stream of interest income.
- Owing to their minimal default risk, these securities is far more secure compared to other instruments.
- Some government securities are subjected to taxes.
- Transaction of these debt instruments is pretty seamless
- Government securities are accessible via exchange-traded funds and mutual funds.
Cons of Government securities
- Government securities render a minimal rate of return compared to other securities.
- The interest rates of such securities usually get compromised with inflation.
- Government securities provided by the overseas government are prone to risk.
- Government securities largely pay out a low rate, particularly in rising-rate markets.
Conclusion
Government securities mentioned above are the legit investment options for those who are more concerned about the risk and seek assured returns. Given that there is diverse bandwidth of government securities in India, it is simple to opt for the best alternative for your portfolio.
With diverse investment tenure available against these securities, you can opt for the product that ensures the best fit for your investment timeline. In addition to rendering you assured income or returns, investing in these debt instruments also lets you balance the risk factor in your investment portfolio. Waiting till maturity is the best thing investor can do to max out the return. Remember that pre-mature redemption of security is prone to minimal return and prevent investors from availing of the accrued interest.
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