Government securities (G-Sec) are often known for their safety and guaranteed returns. In the previous post, we discussed one of the G-Sec – Treasury Bills, often referred to as T-bills.
And in this post, we’re going to discuss the second type of G-Sec – Long-dated Bonds, often referred to as Government Bonds.
We’ll help you understand what Government Bonds are, how they work, and whether you should invest in them.
Estimated read time: 4 minutes and 58 seconds
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Buckle up. Here we go!
What are Government Bonds?
Government bonds are essentially loans that you, as an investor, provide to the Central Government.
When you purchase a government bond, you are lending your money to the government for a predetermined period, and in return, the government promises to pay you interest at regular intervals (usually semi-annually) and return the principal amount at the end of the bond’s tenure.
These bonds differ from T-bills on 2 counts. Government Bonds have long-dated maturities (3 to 40 years), and they pay interest twice a year.
How do Government bonds work?
Government bonds are medium to long-term debt instruments issued by the RBI on behalf of the government to raise funds. They are one of the safest investments out there.
RBI auctions Government bonds almost every week. You can check the future auctions here. The auction process of T-bills and Government bonds is almost the same. We have explained the auction process of the G-Sec auction here.
With a minimum investment amount of ₹10,000, you can invest in Government bonds through NSE, banks, or your online stock broker like Zerodha. One popular way to invest in G-Secs is through the Retail Direct Gilt Account, a platform that allows retail investors to buy government securities directly from the RBI.
If you are new to the concept of bonds, check out our bond series, where we have covered the basics of bond investments.
How to interpret Government bonds names or symbols?
Every bond issued has a unique name or symbol. The names or symbols of G-Secs typically provide essential information about the bond’s features, such as maturity and coupon rate.
For example, here is a symbol – 824GS2027, and what this means is –
Annualized interest – 8.24%
Type – Government Securities (GS)
Maturity – 2027
This issue is expiring in 2027. If you were to invest in this bond, you would receive an 8.24% interest every year until its maturity in 2027.
Please note that the interest will be paid semi-annually, so you will get 4.12% interest twice a year. Finally, upon maturity, you will also get back your principal amount.
Benefits
- Safety: Government bonds are considered one of the safest investment options because the government backs them. This means there is very little risk of default on interest payments or the principal amount.
- Steady income: Government bonds provide a predictable and stable source of income through regular interest payments. This can be especially appealing for retirees or those seeking a fixed income stream.
- Liquidity: While government bonds have a fixed tenure, we can sell them in the secondary market before maturity. This provides investors with some degree of liquidity if they need to access their money earlier.
Disadvantages
- Low liquidity: While you can sell Government bonds in the secondary market before maturity, the volume in the secondary market can be low. This might increase the chances of selling your bonds at lower prices in times of emergency. You can check the secondary market volume here.
- Lower returns: Government bonds generally offer lower returns compared to other investment options, like corporate bonds. This makes them less attractive to investors seeking higher yields. But these higher yields come with higher risk.
- Interest rate risk: If you purchase a long-term government bond and market interest rates rise, the value of your bond in the secondary market may fall. This can result in a capital loss if you decide to sell before maturity.
Why and when should you invest in Government bonds?
So, when should you consider investing in government bonds?
- Stability: Government bonds are an excellent choice for conservative investors who prioritize stability and safety in their portfolios. If you’re risk-averse and want to protect your capital, G-Secs can be a valuable addition.
- Regular income: If you require a steady stream of income, such as retirees looking for a pension-like income, government bonds can be a reliable source of interest payments.
- Diversification: Even if you have a well-rounded investment portfolio, adding government bonds can enhance diversification and reduce overall risk.
- Medium to long-term goals: If you have financial goals that are a few years away, such as buying a home or funding your child’s education, a small portion of your portfolio in long-term government bonds can help you achieve those objectives while preserving your capital while reducing the overall risk.
Government bonds can be a cornerstone of your investment strategy, offering safety, stability, and income. They provide an excellent balance to riskier assets in your portfolio and can help you achieve your financial goals.
However, it’s crucial to remember that while government bonds are safe, they might not provide the same potential for high returns as other investments. Your choice to invest in G-Secs should align with your financial objectives and risk tolerance.
In the world of personal finance, knowledge is power, and understanding government bonds is a significant step toward building a robust and diversified investment portfolio.
So, whether you’re just starting your investment journey or looking to fine-tune your strategy, consider including government bonds as a valuable component of your financial plan.
Remember to share these insights with your buddies. Until next time!
Still Curious?
If you are like me, who likes to analyse a little more or check out content in different formats, well you are in luck. Below you can find some suitable content we found.
RBI – Government Securities Market in India – A Primer
Zerodha – Trading Q&A – Basics of Government bonds
RBI Retail Direct – FAQS – Understanding Government Securities
Note: We don’t have any affiliation with them. We are sharing links only for educational purposes. The opinions expressed by them belong solely to them and do not reflect the views of Vrid.