Government Securities

When it comes to safe and stable investments, government securities stand out as one of the most trusted options. But what exactly are they? Let’s take a deep dive into this important investment instrument

What are government securities in India?

Government securities are financial instruments like treasury bonds, treasury bills, and dated securities that are either issued by the central government or the state government. Essentially, they are loans given to the government by investors, and in exchange, the government agrees to pay a fixed interest rate over a set period of time. What sets them apart is their reputation for safety and their risk-free status, as they are backed by the sovereign guarantee of the Indian government.

What are examples of government securities?

In India, you’ll often come across government securities as treasury notes, treasury bills, bonds, TIPS (Treasury Inflation-Protected Securities), and savings bonds. Investors appreciate these options because they usually offer a fixed interest rate and can easily fit into a balanced portfolio. Whether you want to park short-term surplus money or plan for long-term income, you’ll likely find a suitable security.

Who can buy government securities?

Until 2001, only banks and large financial institutions and mutual funds were allowed to buy government bonds either by bidding for new bonds or buying pre-existing bonds, but after that, it became open for retail investors at 5% of the specified amount for the government securities issued. A retail investor can be an individual, a corporate or any institution permitted by the RBI

How do you trade in government securities?

When the government wants to raise money, it organises auctions through the RBI. This is where primary market transactions happen, mostly restricted to commercial banks, financial institutions, insurance companies, and state or central governments. Once the bonds are auctioned and distributed, they enter the secondary market. Here, they can be freely traded just like shares, allowing individuals and corporations to buy and sell them easily.

Why do banks invest in government securities?

The main purpose is the Statutory Liquid Ratio, this is a rule set by the RBI which obligates commercial banks to deposit a specific amount in the central bank in the form of Gold, Cash or Securities. Naturally, they prefer government securities for this purpose. Why? These instruments offer a stable, fixed interest rate and can also help the banks earn some returns instead of keeping cash idle.

What are the features of government securities?

Here are the notable features of government securities:

• Issued only by the Indian government, either central or state.
• Considered extremely safe and risk-free.
• Offer a fixed interest rate, though relatively lower than other risky instruments.
• Have substantial liquidity — they can be easily resold in the secondary market.
• Have different durations to suit both short- and long-term investors.

What are the advantages of investing in government securities?

Investing in government securities carries several benefits:

• Safety & Risk-Free Nature: Since they’re backed by the Indian government, they come with virtually no risk of default.
• Reliable Interest Income: You receive a fixed interest rate that pays out at regular intervals, which can add steady income to your portfolio.
• Long-Term Investment: Many bonds and dated securities have long maturity periods – perfect for long-term goals like retirement planning.
• Liquidity: You can sell them in the secondary market when you need cash.
• Tax Benefits: Some bonds come with tax advantages.

Can an individual buy government securities?

Yes. Individual retail investors cannot usually participate directly in the primary market when bonds are auctioned. However, they can buy these government securities on the secondary market. The minimum value is as low as ₹10,000 per bond, making them affordable. Also, thanks to the RBI’s Retail Direct Gilt account facility, you can buy them online, making this one of the most accessible investment options for all.

Are government securities a good investment?

That depends on your investment goals. From a safety and reliability standpoint, government securities are backed by the sovereign guarantee and virtually have zero default risk. They’re perfect for conservative investors who want stable returns with minimal hassle. However, compared to high-risk assets like equities or corporate bonds, the returns from government securities may be modest, often just enough to outpace inflation. It’s all about finding the right balance.

What is the difference between government securities and bonds?

While people often use the terms interchangeably, there’s a subtle distinction:

• Government securities refer only to debt instruments, like treasury bills, dated bonds, or state-issued bonds, that are guaranteed by the Indian government.
  
• Bonds, on the other hand, are a much broader category. They can be corporate bonds, municipal bonds, or even infrastructure bonds – not necessarily backed by the government. This means bonds can offer a much wider range of risk and return, depending on who issues them.

Conclusion

Government securities investments are one of the safest ways to invest your money in India. They work well whether you want to reduce risk in your portfolio, save for the long term, or just park your money safely for a while. You can choose from short-term options like treasury bills or long-term bonds. These come with the backing of the government, offer regular interest payments, and can be sold easily if you need cash. While the returns are lower, the safety and reliability make them a popular choice for many investors.

FAQs