Types of Government Securities
The article provides you a complete knowledge regarding the variety of available government securities in the market. It is your duty and responsibility to ensure good knowledge before investing just to maintain safety.
In this article, we shall discuss the following:
- Government securities
- Types of government securities in India
- Treasury Bills
- Cash Management Bills (CMBs)
- Dated Government Securities
- State Development Loans
- Treasury Inflation-Protected Securities (TIPS)
- Zero-Coupon Bonds
- Capital Indexed Bonds
- Floating Rate Bonds
Before we begin, let us first understand what are government securities?
The Government of India issues securities to raise capital for development projects. These securities are called government securities or G-secs, issued by RBI. The RBI manages the public debt of the Indian government.
G-secs are issued in three forms: treasury bills, dated securities and bonds. Treasury bills have maturities of around one year or less. Bonds have maturities that exceed ten years. G-Secs are considered to be very safe investments.
This article shall discuss in detail the different types of government securities in India.
G-Secs are attractive to investors because they are comparatively less risky compared to other assets like equities. This is because, the returns are guaranteed by the government. Although, there exists some market-related risks, but if you simply hold on to these bonds until maturity, the risk factor can be nullified.
Types of government securities in India
In India, RBI provides several G-secs: Treasury Bills, Cash Management Bills (CMBs), Dated Government Securities, State Development Loans, Treasury Inflation Protected Securities (TIPS), Zero-Coupon Bonds, Capital Indexed Bonds, Floating Rate Bonds.
We shall discuss the topics in brief.
Government Bonds: All About Indian Government Bonds
The Indian government raises money through the sale of Treasury Bills, which are money market instruments. These are short-term debt instruments with maturities ranging from 91 days to 364 days. The government uses the proceeds from the sale of these bills to finance its budgetary deficits.
Popularly, the treasury bills are issued in three different tenors, namely -
- 91 days
- 182 days
- 364 days
In the present date, the government of India issues the 14-day Treasury bill. These are considered to be extremely beneficial in managing short-term liquidity.
These bills are available for a minimum of Rs.25000.
Multiple financial instruments pay interest to you on your investment. However, treasury bills pay no interest because they are called zero-coupon securities. Instead of paying the interest, the treasury bills are issued at a discount rate and later redeemed at face value on the actual date of maturity.
For suppose, a treasury bill of 91 days holding a face value of Rs. 200 may be issued at a rate of 196, with a discount of Rs. 4 and then later redeemed at a face value of Rs. 200.
However, the Reserve Bank of India performs weekly auctions to issue treasury bills.
Cash Management Bills (CMBs)
One type of government security is the Cash Management Bill (CMB), which is newly introduced in the Indian Financial Market. In the year 2010, the government of India, along with the Reserve Bank of India, introduced security. Cash Management Bills are similar to Treasury Bills because these are short-term securities which can be issued when necessary. The primary difference between Cash Management Bills and Treasury Bills is the maturity period. Cash Management Bills are issued for less than 91 days of the maturity period, thus making this security an ultra-short investment option.
This security is used by the government of India, generally to fulfill the temporary cash flow requirements.
Dated Government Securities
The most common type of security is the dated government security, issued by the central government. These are unique types of security because they either have a fixed or a floating rate of interest, also known as a coupon rate.
These securities are issued at face value at the time of issuance, and remain constant until redemption. These government securities are recognized as long-term market instruments, compared to the Treasury and Cash Management Bills. This is because they deliver a broad range of tenure, starting from five years up to forty years.
The investors investing in these Dated Government Securities are called primary dealers. The government of India issues nine different types of Dated Government Securities, given below-
- Special Securities
- Capital Indexed Bonds
- Bonds with Call Options
- 75% Savings Bonds, 2018 (Taxable)
- Fixed Rate Bonds
- Floating rate Bonds
- Inflation Indexed Bonds
State Development Loans
The State Development loans are dated government securities. These securities are issued by the state government with the objective of meeting their budget requirements.
With the help of Negotiated Dealing System, the issue is auctioned once every two weeks. The State Development Loans support a similar method of repayment. It features a variety of investment tenures.
When coming to rates, the State Development Loans, when compared to Dated Government Securities, hold a slightly higher rate.
The main point of difference between Dated Government Securities and State Development Loans is that the Central Government issues the Government securities, whereas State Development Loans are issued by the Government of the State.
Treasury Inflation-Protected Securities (TIPS)
One type of security that is gaining popularity in India is the Treasury Inflation-Protected Security (TIPS). These are available on the basis of a five, ten or thirty years term period. The users enjoy interest payments every six months through these securities.
These securities are similar to Conventional Treasury Bonds. The major point of difference between them is that in a Standard Treasury Bond, the same principle is issued during the entire term of the bond. The par value of TIPs will increase gradually to match up to the Consumer Price Index and keep the bond's principle on track concerning inflation. The rise of inflation during the year will increase the security value.
Hence, you hold a bond which maintains its value throughout life instead of a bond which is worthless after maturity.
The Zero-Coupon Bonds were issued on January 19th, 1994. These bonds are typically given at a discount to face value and redeemed at par. The Zero-Coupon Bonds do not carry any rate of interest or coupon because the tenure is pre-fixed for the security. Hence, the security is redeemed at face value once the date of maturity is attained.
Capital Indexed Bonds
India has a variety of government securities, each with its characteristics and risks. One type of government security is the capital indexed bond, which is designed to provide protection against inflation.
In Capital indexed bonds, the rate of interest comes in a fixed percentage over the wholesale price index.
On December 29, 197, these bonds were floated on a tap basis.
Floating Rate Bonds
Did you know that the Indian government offers a type of bond called a Floating Rate Bond (FRB)?
The Floating Rate Bonds does not hold a fixed coupon rate. The Government issued these bonds in September 1995 as Floating Bonds.
FRBs can be a good investment for risk-averse investors who want to protect their portfolio from rising interest rates.
Government securities are a vital part of the economy and provide many benefits to both investors and the government. They are a safe and reliable investment and offer a great way to diversify one's portfolio. There are many variety government securities in India, each with its set of features and risks. It is important to carefully consider these before investing, often with the assistance of a share trading app. These securities provide fixed income which help investors align with the risk factor.
Disclaimer: ICICI Securities Ltd. (I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Venture House, Appasaheb Marathe Marg, Prabhadevi, Mumbai - 400 025, India, Tel No : 022 - 6807 7100. The contents herein above shall not be considered as an invitation or persuasion to trade or invest. I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon. The contents herein above are solely for informational purpose and may not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments or any other product. Investments in securities market are subject to market risks, read all the related documents carefully before investing. Investors should consult their financial advisers whether the product is suitable for them before taking any decision. The contents herein mentioned are solely for informational and educational purpose.