Investing in government securities is one of the safer investment options available to individual investors because these are risk-free instruments and provide portfolio diversification and are available for longer investment durations.
Government securities, popularly known as G-Secs, are issued by Reserve Bank of India (RBI) on behalf of the central or state governments. These securities are absolutely risk-free and guaranteed by the government. Generally, investors think that G-Secs are meant for banks, financial institutions and large corporations, but as small investors, every individual can also make an investment.
Recently, BSE announced that they are going to launch ‘BSE-Direct’, a trading platform for retail investors from December 3, 2018 onwards. The National Stock Exchange has launched a mobile application and web-based platform—NSE goBID (Government Bond Investment Destination).
Let us understand the salient features of G-Secs and compare the same with similar kind of instruments for investment purpose.
The bond market in India consists of mainly two categories—corporate bonds and government bonds. The government bonds are issued by RBI on behalf of the government of India in order to finance the fiscal deficit. Government issues both short- and long-term bonds. Short-term bonds come with a maturity of less than one year which are popularly known as Treasury Bills (T-bills) whereas long-term instruments come with a maturity of one year or more and are called government bonds or dated securities. Interest on the government bonds are payable either annually or semi-annually.
T-bills vs bonds
T-bills are money market, short-term debt instruments. There are three types of T-bills available according to the maturity period. They come with a maturity period of 91, 182 and 364 days. T-bills are sold at a discount and redeemed at face or par value. So, they do not have an explicit interest component. This is the major difference between T-bills and bonds.
For instance, if you buy a 91 day T-bill for `97 with par value of `100, it means that after 91 days, you will get `100 and thus you got a return of `3. This is similar to that of buying a share for `97 and selling the same after 91 days at `100. The catch here is that this is an assured and guaranteed transaction which means that there is no chance to sell the T-bills either below `100 or above `100.
So, this T-bill offered you an annualised return on investment of 12.41%, but since you held it only for 91 days, you will enjoy this return on a pro rata basis. Bonds differ from T-bills on two counts. Contrary to the T-bills, bonds have long-term maturities (normally more than one year) and they pay interest semi-annually. The Clearing Corporation of India Limited (CCIL) is the clearing agency for G-Secs and it acts as a central counter party for all transactions between two counter-parties.
G-Secs better than fixed deposits?
G-Secs are more lucrative than bank fixed deposits for the following reasons. First, they are backed by the government. In fixed deposits banks deduct TDS whereas in the case of T-bills it is the responsibility of the investor to pay the necessary taxes on the interest income, if applicable. Government bonds are available for longer duration maturities, say, five or ten years but such long duration fixed deposits are not available. By all means, G-secs is a better option than bank fixed deposits.
To conclude, investing in government securities is one of the safer investment options available to individual investors because these are risk-free instruments and provide portfolio diversification and are available for longer investment durations.
The writer is a professor of finance & accounting, IIM Tiruchirappalli