Types of Government Securities
Share market is an attractive investment opportunity. However, your options in securities are not limited to share investments and go much beyond that. The stock market is a collective term, which comprises various tradeable securities, including equity, bonds, commodities, currencies, etc.
You can choose trading securities per your risk profile and investment objective. If you are a high-risk taker, you can invest in stocks. However, if you are a risk-averse or low-risk investor, you can invest in fixed income options like government securities.
Government securities are protected from market volatility and offer fixed income. There are different types of government securities available for trading in the stock market.
Here is everything you should know about government securities and their types:
What are Government Securities?
Government securities, also known as G-Secs, are a variety of debt instruments issued by the both central and state government of India. The government securities are issued to gather funds for independent government operations.
Government securities are issued for short-term (maturity of less than one year) or long-term (maturity of one year or more). G-Secs are backed by the government and practically carry no risk of default. These securities offer fixed returns in the form of interest. For this reason, they are also called gilt-edged or risk-free securities.
What are the Different Types of Government Securities?
If you are a low-risk investor or want to invest in government securities to optimally diversify your investment portfolio, understand the types of government securities.
There are four major types of government securities:
- Treasury Bills
Treasury bills or T-bills are government securities issued by the central government of India. T-bills come with short-term maturities of less than one year. Presently, T-bills come with three tenors in India – 91 days, 182 days and 364 days.
Treasury bills are zero-coupon securities, which means you are trading in government security that offers no interest. However, Treasury bills are issued at a discount but redeemed at their original face value. For instance, if you buy a 182-day Treasury bill of face value ₹100 at a discounted price of ₹98. In this case, your return is the difference in the T-bill face value and discounted price.
A short-term treasury bill helps the government raise funds for its current obligations and reduce the fiscal deficit in the economy. Trading of T-bills is done by the RBI (Reserve of India), who auctions such securities every week in the stock market. You can choose to buy T-bills through a registered broker or participant commercial bank.
Also Read: Online Trading
- Cash Management Bills (CMBs)
CMBs were introduced by the government of India for trading in 2010 to fulfil the demand for short-term investment securities. The primary aim for issuing CMBs is to cover the temporary mismatch in the cash flow records of the Government of India.
CMBs are also zero-coupon securities and work like T-bills. However, they are only issued for a maturity period of fewer than 91 days. This feature makes CMBs a near-to-liquid investment option.
The date of issue and tenure depends on the cash requirement of the government. As an investor, you can invest in CMBs to meet your short-term investment goals.
- Dated Government Securities
Dated government securities are long-term investment options that offer fixed or floating interest rates, also known as coupon rates. Generally, the tenure of dated G-Secs is between 5 years to 40 years.
These securities are issued at face value. The coupon rate is applicable on the face value of the investment and paid on a half-yearly basis in the form of interest. In India, there are nine types of dated government securities being traded in the stock market. These include:
- Fixed-rate bonds
- Floating rate bonds (FRB)
- Capital indexed bonds
- Inflation-indexed bonds (IIBs)
- Special securities
- Bonds with call/put options
- STRIPS (Separate Trading of Registered Interest and Principal of Securities)
- Sovereign Gold Bond (SGB)
- 7.75% Savings (Taxable) Bonds, 2018
- State Development Loans (SDLs): SDLs are dated G-Secs issued by the state government to raise funds to meet their financial requirements. SDLs pay interest half-yearly and repay the principal upon maturity. SDLs are issued through the same auction process as dated G-secs.
Overall, G-Secs are a good investment option because of the fixed cash flow of interest payment and no risk of default. G-Secs are also a conservative, risk-free investment option that all types of investors can consider to diversify their investment portfolio.
Frequently Asked Questions
As per SEBI’s new mandate, the pledged shares stay in the investor’s demat account and are marked in the stockbroker’s favour. Hence, it is not possible for the broker to take these shares away or misuse them.
A floating rate bond is a security that has no fixed coupon rate. The interest is re-set at defined intervals, such as every six months or in a year.
T-bills come with a fixed tenor of 91 days, 182 days and 364 days. There is no option to buy for six months. However, you can choose a T-bill with a maturity of 182 days, which is closest to six months.
Yes, the price of SGB is linked to Gold in India.