All you need to know about Government securities

Blog | Investing


Hey there! Now that you are here, we assume you are thinking of diving into the world of Government Securities. Don't worry if you are new to this asset class – we have got you covered. Here’s everything you need to know without any confusing jargon, we promise. So, let's get started!

What are Government securities?

First up, what are Government securities? Now you know the government needs money for important projects like building schools, and hospitals or for improving infrastructure. To raise that money, they issue an instrument called Government Securities, or G-Secs. Think of these like IOUs aka ‘I owe you’ that the government gives to people who invest in them. 

Put simply, a G-sec is the government saying, "Hey, I have taken a loan from you and I owe you this money and I promise to pay it back at such-and-such date with X% interest." That interest, by the way, will be your returns. 

Types of Government securities 

Now, there are two types of G-Secs: short-term and long-term. 

*Short-term ones are called Treasury Bills or T-bills and mature within a year.

*Long-term ones are called Government Bonds or Dated Securities with a maturity period of one year or more.…But, Dated securities…no, don't let the name scare you. 

Dated G-Secs are those bonds where the date of maturity is clearly mentioned (ranging from 5 to 40 years). What’s more, these typically come with a fixed or floating coupon, which is basically like an interest rate. And here's the cool part – you get paid that interest on the face value (the original value of the security) every six months. So, while you wait for your investment to mature, you also have a little bonus coming your way twice a year! 

The Central government issues both Treasury Bills and Government Bonds, while State governments only issue Government Bonds, which they call State Development Loans (SDLs).

What makes the prices of G-Secs move?

Now, let's talk about what can affect the prices of G-Secs. Just like the stock market, there are factors that can make the prices go up and down. Here is a list of factors that can have a bearing on G-Sec prices in the secondary market.

*Changes in interest rates

*Inflation expectations

*Market liquidity meaning availability of buyers and sellers

*Even international bond market developments specifically in US bonds 

What about taxes on G-Secs?

Alright, let's talk taxes – it's not the most exciting topic, but it's important. How your G-Sec investment is taxed depends on the type of G-Sec you have. For Government Bonds and SDLs or State development loans,  you will receive 100% of interest amount without any tax deduction. However, this interest income will be added to your taxable income at the end of the financial year and you will have to pay tax on it as per your tax slab.

If the value of your G-Secs goes up and you make a profit then it will be subjected to LTCG or STCG, depending on the holding period, If you sell your G-Secs before one year, the gains will be considered STCG or Short term capital gains and if you sell them after one year, the profits you make after selling G-Secs will be categorised as LTCG or long term capital gains. Put simply, your tax implications on profits earned after selling G-Secs will depend on the holding period. 

While we are at it, let's tell you more about how you can sell the Government securities you hold. G-Secs are tradable instruments in the secondary market and can be sold just like stocks.

Are G-Secs risky?

Simply put, G-Secs have almost no risk of default, considering that they are issued by the government. Having said that, we should mention a few things to watch out for with G-Secs. 

*First, there's the market risk. If interest rates change, the value of your G-Secs may go up or down. So, holding onto them until they mature can be a smart move. 

*Lastly, there's the liquidity risk – As we already told you that G-Secs can be sold in the secondary market, just like stocks. However, at times, say you need to sell your G-Secs quickly, you might not find a buyer right away, and you might have to sell them at a less favourable price.


Are G-Secs made for you?

At this point, you might be wondering if G-Secs are a good investment for you. Fret not, we have a checklist ready for you! Ask yourself the following questions and you will crack the code.

Q1. What is more important for you, safety or returns? If safety is your top priority, G-Secs are a great choice.They are issued by the government and carry almost zero default risk. Hence, they are considered risk-free or ‘gilt-edged securities’, which means they are pretty safe and reliable. 

Q2: Do you prefer your investments to be reasonably liquid? Because with G-Secs, you can cash out your investment before it reaches maturity if you need to.

Q3: Are you planning to invest for retirement with an aim to have a fixed source of income in the future? With G-Secs, the income inflow remains constant. 

Q4: Are you looking to diversify your investments? If yes, then G-Secs can add that much needed stability to your portfolio.

To wrap things up, Government Securities can be a solid and secure investment option, especially if you're looking for a stable, fixed income and don't want to deal with complex tax processes, or if you are looking to diversify your portfolio. What’s more, these are available in a variety of tenors, can be easily sold to meet cash requirements and can also be used as collateral for loans. We hope this blog has been helpful and has made the world of G-Secs a little less intimidating. Happy investing!


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