What are the Types of Government Securities?

Government securities play a vital role in the financial markets and are preferred by investors seeking safety and stability. These securities come in various forms, each with its unique features and characteristics. This article will explore the different types of government securities, shedding light on the options available for investors looking to allocate their funds to this low-risk asset class. Let’s explore more.

Topics Covered :

• What are Government Securities?
• What are the Different Types of Government Securities in India?
• Conclusion

What are Government Securities?

Government securities, also known as G-secs, are popular investment tools that the Indian state and central governments issue. The objective is to raise capital from the public and secure emergency funds for operational purposes. Investments in these fixed-incomeinstruments earn regular interest income for investors. The government specifies a coupon rate at which these government bonds deliver interest payments. As these investment tools have the government’s backing, they have negligible risks associated with them. The securities also repay the principal amount to the investors at maturity.

Earlier, governments issued these securities for large financial bodies only, like big-scale companies, high-net-worth investors, and commercial banks. However, now they also offer G-secs to individual investors and cooperative banks. Sovereign guarantee, inflation adjustment, and regular income stream are some of the most relevant reasons that make them popular investment options.

What are the Different Types of Government Securities in India?

Government securities

are low-risk investment options with different types to choose from. We can broadly classify them into the following categories:

Treasury Bills

Treasury bills or T-bills are short-term G-secs that the central government issues with a maturity not exceeding one year. These are short-term instruments valid for 91, 182, or 364 days. While most financial instruments deliver interest benefits, treasury bills are zero-coupon securities that do not pay any interest. Instead, the investors may invest in them at discounted rates and redeem them on maturity at their face value. For instance, one may invest in a 91-day T-bill worth ₹ 2,000 at ₹ 1800 and redeem it at maturity for ₹ 2,000.

Recommended Read: Types of Bonds for Investors

Cash Management Bills (CMBs)

CMBs have recently entered the Indian financial market. The central government and the RBI started issuing these bills in 2010. Instead of paying interest, these work similarly to treasury bills but with even shorter maturity periods of less than 91 days. The government issues these ultra-short investment options to meet temporary cash flow needs.

Dated Government Securities

These are unique types of government securities with fixed or floating rates of interest, known as the coupon rate. The central government issues these securities at face value, which remains the same till redemption. Unlike T-bills and CMBs, dated securities are long-term market instruments with tenures ranging from 5 to 40 years. The Indian government issues different types of dated securities, including the following:

Floating Rate Bonds

Instead of having a fixed coupon rate, the rate of floating rate bonds changes at intervals, adding a spread to the base rate.

Fixed Rate Bonds

These bonds have fixed coupon rates that remain unchanged throughout the bond’s tenure till maturity.

Capital Indexed Bonds

These bonds deliver a fixed percentage interest rate over acceptable inflation indices, hedging the principal amount against inflation.

Inflation Indexed Bonds

These bonds deliver a fixed interest rate over the Consumer Price Index (CPI) and Wholesale Price Index (WPI). Consequently, they effectively shield both the principal and interest amounts against inflation.

Recommended Read: Difference Between CPI and PPI

STRIPS or Separate Trading of Registered Interest and Principal of Securities

These securities allow investors to treat eligible treasury bonds and notes as individual securities and hold and trade their individual principal and interest components.

Bonds with Call/Put Options

The government issues these bonds with an option for investors to ‘Call’ the bond by buying it back or ‘Put’ by selling it to the issuer within the currency period.

State Development Loans

These are dated government securities that the state governments issue to meet their budgetary requirements. The government uses the Negotiated Dealing System to issue these securities in auctions every two weeks. The investment tenures vary with higher rates than dated securities. 

Treasury Inflation-Protected Securities (TIPS)

Treasury Inflation-Protected Securities, or TIPS, have maturity periods of over 5, 10 or 30 years, delivering interest payments to investors every six months. Similar to conventional treasury bonds, their par value increases with time according to the CPI, keeping the bond on track with inflation. For instance, if the inflation rate increases during a financial year, the security’s value will also increase during that year. That means the bond will maintain its value over life instead of becoming worthless after maturity.

Tap Stocks

Tap stocks are gilt-edged government securities that the government releases into the market gradually after reaching predetermined market prices and subscription levels. They can be short or long-dated stocks with differences in maturity periods.

Partly Paid Stocks

The investor must pay the principal amount in installments over a fixed period in these stocks. The objective is to benefit both the government and the investor. The government receives the required funds immediately, and the investors get a regular inflow of funds.

7.75% GOI Savings Bond

The government introduced this security to replace the 8% savings bond in 2018. As its name suggests, it delivers an interest rate of 7.75%. According to the RBI regulations, only Indian citizens, HUFs, and minors with legal guardians can hold these bonds. The interest income is taxable under the Income Tax Act 1961 as applicable to the investor’s income tax slab. The minimum investment amount is INR 1,000 and in further multiples of INR 1,000.

Sovereign Gold Bonds (SGBs)

The Central Government issues these bonds that investors can use to invest in gold for extended periods without handling physical gold. The interest earned on these bonds is tax exempted. The rates of these bonds are linked to gold prices based on the gold rate per gram. Different entities have individual ceilings for the possession of SGBs. For instance, individual and HUF investors can hold up to 4 kg of Sovereign Gold Bonds.

Conclusion

Considering the different types of government securities in India, investors can choose the best option suitable for their portfolio. Since the maturity period makes a major difference between these options, it’s worth selecting the product that best aligns with the investor’s timeline. Apart from offering guaranteed returns, G-secs help investors balance their risk factors. Open a Demat account now at Religare Broking and invest in your chosen government security to earn returns.