The stability and protection provided by government securities is well-known. These securities are often added to portfolios by experienced investors who want to diversify their portfolio and lower risk.
To raise capital on the Indian market, government securities are sovereign bonds that the Indian government issues. These bonds are considered safe because they are guaranteed by the government. Government bonds, unlike equalities have tenure and investors can't redeem them before the lock-in period. Investors might minimize its importance. Here are some things to know if you are interested in G-Secs (as government securities are also known).
The Central and State governments issue government securities, which are basically tradable financial instruments that recognize the government's obligation. When the government needs a loan, they are first auctioned by the Reserve Bank of India.
Sometimes, govt securities can be used to raise funds for infrastructure projects and regular operations. They are also backed by the Indian government and offer practically guaranteed returns. G-Secs have a downside: they offer a negligible risk and yield lower returns than other securities. They are still very popular and have experienced steady growth in the Indian capital markets over the past decade.
They are generally divided based on the maturity period into short and long term G-Secs.
T-Bills, also known as Treasury Bills, are short term debt instruments issued and redeemed by the Union Government. They have three maturity periods: 91 days, 182 days or 364. These bills are not subject to interest and can be redeemed at the actual value of their tenor. You may be wondering why these bills exist.
You gain from the price differential in the case of Tbills. Let's explain in detail. If you buy a 91-day T.Bill with Rs. 100 at a discount price of Rs90. After 91 days, you will get Rs 100 from the government in your Demat account. You will earn Rs. 10 on the trade. Other short-term bills, known as Cash Management Bills (CMBs), are also available. These bills are issued for less that 91 days.
Another popular option is the long-term G.secs.
T-bills can only be issued by the central government. Only bonds and dated securities can be issued by state governments. In this case, they are called State Development Loans (SDLs). Bonds generally have a longer maturity period and pay interest twice per year. They can vary in nature depending on whether they are available with fixed or floating interest rates, protection from inflation, put or buy options, special subsidies and links to gold valuation. Tax exemptions may also be available. Each bond is assigned a unique code that identifies its annualized interest rate, type, year of maturity, and origin.
India's government securities are often sold at auction, where the Reserve Bank of India permits bidding based on either yield or price. These securities are issued in the primary market between banks, central and state governments, financial institutions, and insurance companies.
These govt securities are then sold to secondary markets, where they are sold to individuals, trusts and companies, as well as to the RBI. These bonds' prices are determined by the amount paid at auction. Despite holding the largest share of these bonds in the past, commercial banks have seen their share drop in recent years.
After allotment has been completed, they can be traded as normal securities on exchanges or to any other institution or person you choose. The minimum investment required to trade them is Rs. 10,000
Because they are relatively risk-free, government bonds are a popular choice. These bonds don't react to market volatility, and can still be traded as regular stocks. They are also liquid. These bonds are more suitable for risk mitigation and lower portfolio risk exposure, even though they yield a lower return.