Given a choice, wouldn’t you want a government job? Why? Because it gives you a job security – however low the salary might be compared to a private job. The sense that you will not lose your job in Covid-like disruption is comforting.
Similarly, when it comes to investment, a government guarantee feels tempting – however low the returns might be. This is why people prefer to invest in instruments that come with the government guarantee, also called sovereign guarantee. One such instrument is government security. What a government job is in the employment world, the government security is in the investment world.
Content:
- Government securities meaning
- Types of government securities
- Treasury bills
- Cash management bills
- Dated government securities
- State development loans
- Government securities example
- How to invest in government securities
- Quick Summary
Government Securities Meaning
What are the revenue sources for the government? Broadly, direct and indirect taxes. If the government falls short of the revenues, it approaches the Reserve Bank of India to borrow the money. With the help of the RBI, the government launches bonds or treasury bills (we’ll explain it soon) to raise money from the public. These bonds and treasury bills are called government securities (G-sec).
You may not trust your friend or a relative to return your money, but you do trust the government that it won’t default on your payment. This sovereign guarantee is the key feature of government security. One invests in a government security at a fixed interest rate for a predefined period, after the end of which you get your money back along with the interest.
The only downside to the g-sec is the returns are relatively lower compared to other securities due to the negligible risk associated with them.
Types of Government Securities
The government securities come with different maturity period, based on which these are classified in following types:
Treasury Bills
Treasury Bills or T-Bills are short term government securities issued by the Union Government. They come in three variants — 91 days, 182 days, and 364 days. T-Bills do not pay interest amount.
Then why would you invest in them, you wonder? They may not have “the interest” component but they are issued at discount to their par/real value.
For example, if the par value of a T-Bill is ₹ 100, you may get it at an issue price of ₹ 95. However, on maturity you will get the entire ₹ 100. Therefore, the price difference between the par value and the issue price that is ₹ 5 is your return on T-Bill.
Cash Management Bills
Cash management bills, or CMBs, are new to India, launched only in 2010. CMBs are issued to meet immediate cash shortage or debt obligations that the government may face. Their features are similar to those of T-bills but they are issued for maturities less than 91 days.
Dated Government Securities/ Government Bonds
When a government security is launched for the long-term, it is called a long-dated government security. Unlike T-Bill and CMBs, Government Bonds pay the interest amount twice a year. The maturity period could be anywhere between 5 years and 40 years. The interest amount, called coupon rate, could either be fixed or floating.
Here are some types of the government bonds:
Fixed Rate Bonds
When the coupon rate remains fixed throughout the tenure of the bond it is called fixed rate bonds.
Floating Rate Bonds
When the coupon rate is reset after every six-month, it is called the floating rate bonds. The government launched the Floating Rate Savings Bonds 2020 (Taxable) scheme with an interest rate of 7.15 percent on July 1, 2020.
Capital Indexed Bonds
When the principal amount is linked to an accepted index of inflation. This bond is issued to protect the principal amount of investors from inflation.
Inflation Indexed Bonds
The principal amount and the interest payment both are linked to an inflation index.
Bonds with Call/Put Options
When the issuer has the right to buy back the bond (call option), or the investor can exercise its right to sell bonds to the issuer (put option)
Special Securities
When the government has to compensate entities such as Oil Marketing Companies, Fertiliser Companies and the Food Corporation of India, etc in place of cash subsidies, it issues special securities. These are popularly called oil bonds, fertiliser bonds and food bonds, respectively.
STRIPS
STRIPS (Separate Trading of Registered Interest and Principal of Securities) are essentially Zero Coupon Bonds. However, they are created out of existing securities and unlike other securities, are not issued through auctions.
Sovereign Gold Bonds
Sovereign gold bonds allow investors to take an exposure in gold in the digital form. These are issued periodically in various series each year and come with a maturity of eight years.
The nominal value of the bond is calculated based on the previous week’s simple average closing price of 99.99 percent of purity gold. India Bullion and Jewellers Association (IBJA) publishes the price list. One unit of SGB comprises one gram of gold.
State Development Loans
The bonds issued by state governments are called State Development Loans (SDLs). These are no different from the dated securities. The only difference is latter is issued by the Union government while SDLs are only issued by the state government. Interest is serviced at half-yearly intervals and the principal is repaid on the maturity date.
Government Securities Example
The nomenclature of a government security displays pretty much everything about a particular g-sec. A dated government security with a fixed rate will be displayed like this – 7.17% GS 2028. It contains the following features – coupon, name of the issuer, maturity year.
Coupon: 7.17% paid on face value
Name of Issuer: Government of India
Date of Issue: January 8, 2018
Maturity: January 8, 2028
Coupon Payment Dates: Half-yearly (July 08 and January 08) every year
Minimum Amount of issue/ sale: 10,000
Source: RBI
In case, there are two securities with the same coupon and are maturing in the same year, then one of the securities will have the month attached as suffix in the nomenclature. For example — 6.05% GS 2019 FEB
How to invest in Government Securities?
Earlier government securities were only available to banks and the large financial institutions. However, the RBI has been taking initiatives to make it available to the retail investors as well. It has allowed the NSE to launch a web-based app called NSE goBID through which retail investors can directly invest in g-secs.
Just in February 2020, the RBI also announced that retail investors will be allowed to open g-sec investment account directly with the RBI – both for the primary and secondary issuances. The account will be called RBI retail direct. More details are awaited.
Quick summary
- Goverment securities are basically money raised by the government in form of bonds or treasury bills.
- Treasury bills, cash management bills, dated government securities/bonds are all types of government securities.
- State development loans are similar to dated securities but these are issued by union government.
- Since, RBI has been taking initiatives to make investment available for retail investors it has allowed NSE to launch web based app called NSE goIBD through which retail investors can invest directly in g-secs . The account will be called RBI retail direct of which details are awaited.