What are Government Securities and Bonds?

It is common to borrow money in the form of loans and credit cards to fulfil various financial needs. But what if we told you, you could also be a lender and help not just individuals but also the government, banks and corporates? As unlikely as this may seem, it is relatively common, thanks to investments in government securities and bonds. What are government securities and bonds and why should you be investing in them, let’s find out.

What are bonds?

A bond is a type of debt instrument where you, i.e., the investor, loan money to an entity, such as the government, municipality, or a corporate, for a pre-determined period. The entity uses your money to fund its expansion projects and other operational activities. In return, you receive a variable or fixed interest rate that helps you earn an income.

What are government securities or bonds?

A Government Security/bond, also known as G-Sec, is another debt instrument issued by the central or the state governments to raise capital for operational activities. Government securities can be short- or long-term. The former can have a maturity period of less than a year, while the latter can have a maturity period of a year or more.

Different types of government securities and bonds

Government securities and bonds can be categorised as follows:

• Fixed-rate bonds: Fixed rate bonds have a fixed coupon rate until the maturity of the bond.
• Floating rate bonds: Floating rate bonds have a variable coupon rate that is usually allotted at pre-defined intervals, such as half-yearly or yearly.
• Treasury bills or T-bills: T-bills are money market instruments issued by the Government of India. At present, they are issued in three different tenors of 91, 182, and 364 days respectively. These securities do not have a coupon rate or interest. However, they are issued at a discount and can be redeemed at face value at the time of maturity.
• Sovereign gold bonds: Sovereign gold bonds are issued by the Reserve Bank of India (RBI) as an alternative to trading in physical gold.
• State Development Loans (SDL): SDLs are a type of government securities issued by the state government. 
• Cash Management Bills (CMBs): CMBs are issued by the Government of India to cover temporary discrepancies in the government's cash flow. They are similar to T-bills but have a maturity of less than 91 days.

Advantages of investing in government bonds and securities

Investing in government bonds and securities in India offers several benefits, including:

1. Safety: Government bonds and securities are considered to be low-risk investment options, as they are backed by the government.
2. Predictable returns: Government bonds and securities offer predictable returns, as the interest rate is fixed and the bond's maturity date is pre-defined. This makes it easier for you to plan your investments and expenses.
3. Diversification: Investing in government bonds and securities can help you diversify your investment portfolio, as they tend to move in the opposite direction of equities. This reduces overall portfolio risk.

Conclusion

Government securities and bonds can offer many advantages to you in terms of diversification, low risk, and decent returns. However, they must be chosen carefully on the basis of your financial goals and investment horizon only. It can help to understand the different types of bonds and securities to make the right pick.

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