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Government Securities are securities issued by the Government for raising a public loan. They are a major means of financing Government deficits. It consists of Government Promissory Notes, Bearer Bonds, Stocks or Bonds held in Bond Ledger Account. They may be in the form of Treasury Bills or Dated Government Securities. Government finances its operations largely through taxation and levies. In cases where revenue received from taxation and levies is not enough to meet the expenditure, the government finances the difference (deficit) mainly through borrowing from public by issuing government securities. Thus, government securities are primarily issued for financing part of government expenditure, usually part of the capital expenditure.
Mostly Government Securities are interest bearing dated securities issued by RBI on behalf of the Government of India (GOI). GOI uses these funds to meet its expenditures. These securities are generally fixed maturity and fixed coupon securities carrying semi-annual coupon interest. Since the date of maturity is specified in the securities, these are known as dated Government securities, For instance, 8.5% GOI 2018 is a Central Government security maturing in 2018, which carries a coupon of 8.5% payable half yearly. G-Secs are normally issued in dematerialized form (SGL) but it can also issue in the physical form on request. When issued in physical form or otherwise, they are issued in the multiples of Rs. 10,000/- The tenor of these instruments can extend upto 30 years.
Following are the major features of Government securities;
• Issued at face value
• No default risk as the securities carry sovereign guarantee.
• Sufficient liquidity as the investor can sell the security in the secondary market
• Interest payment on a half yearly basis on face value
• No Tax Deducted at Source (TDS)
• Can be held in D-mat form.
• Rate of interest and tenor of the security is fixed at the time of issuance and is not subject to change (unless intrinsic to the security like FRBs).
• Redeemed at face value on maturity
• Maturity ranges from of 2-30 years.
• Securities qualify as SLR investments (unless otherwise stated).
Generally, Government Securities are issued as interest bearing dated securities by RBI on behalf of the Government of India (GOI). These securities are usually fixed maturity and fixed coupon securities carrying semi-annual interest payments. As their interest rates are fixed, they are subject to market risk. Their prices tend to fall when interest rates rise and their prices go up when interest rates fall. Therefore, investing in these instruments when interest rates are high gives the investor higher returns by an opportunity to sell these securities at a profit when interest rates decline. Below given are the major advantages of Government securities.
• Greater safety and lower volatility compared to corporate bonds and other investments.
• Transparency in transactions and simplified settlement procedures through CSGL / NSDL.
• Variations possible in the structure of instruments like T-Bills, partly paid up bonds,
a Index linked Bonds and other securities with call and put options, etc.. Products
b Like STRIPS also expected to be introduced soon.
• Higher leverage available in case of borrowings against G-Secs.
• No TDS on interest payments.
• Greater diversification opportunities.
Follows are the risks that may arise from investing in government debt securities
• Interest Rate Risk or Market Risk
• Default Risk
Changing market interest rates will affect a security’s price this is called interest rate risk. The market price of a security varies inversely with the equivalent market interest rates. For instance, if the interest rate increases market price of the security will decrease and vice versa. If the holder sells a security before it matures while the prevailing market interest rates are higher than the security’s coupon rate, the holder will get less than the face value.
Default risk is the risk that an issuer of a security might default the repayment of principal and/or interest in a timely manner. But Government debt securities are free of default risk as the securities carry the sovereign guarantee. On the other hand, government debt securities tend to have a lower return than corporate debt securities, which carry higher risk and thus offer higher return to attract investors.
Securities in which the date of maturity is mentioned is called as dated securities. Dated Government securities market in India has two segments such as :
• Primary Market
• Secondary Market
Primary Market consists of the issuers of the securities, such as Central Government and Sate Government, buyers including Commercial Banks, Primary Dealers, Financial Institutions and Insurance Companies. RBI also has a scheme of non-competitive bidding for small investors
Secondary Market includes Reserve Bank of India, Commercial banks, Insurance Companies, Mutual Funds, Financial Institutions, Provident Funds, Trusts, and Primary Dealers. Corporates and Individuals also can invest in Government Securities.
Government securities are normally sold through an auction process although they can also be sold on tap or through Open Market Operations (OMO). Auction is a process of calling of bids with an objective of arriving at the market price. It is basically a price discovery mechanism. There are several variants of auction. RBI conducts auction of Government Securities. Auctions for government securities are normally price based or yield based.
• Price Based
• Yield Based
In this type of auction, RBI announces the issue size or notified amount and the tenor as well as the coupon rate of the paper to be auctioned. The bidders submit bids in terms of the price. This method of auction is normally used in case of reissue of existing government securities. Bids at price lower than the cut off price are rejected and bids higher than the cut off price are accepted. Price Based auction leads to a better price discovery then the Yield based auction.
In this type of auction, RBI announces the issue size or notified amount and the tenor of the paper to be auctioned. The bidders submit bids in term of the yield at which they are ready to buy the security. If the Bid is more than the cut-off yield then it is rejected otherwise it is accepted.
Government Securities are very good investments to park your money. Compared to any other investments, it offers you more security on returns. Most of the people are looking for decent and secured returns, in that respect G-Sec are the best investments for you. For further queries login to MoneyMindz.com. Government bonds give a risk free rate of return. They are Sovereign bonds (Guaranteed by Indian Government) and cannot go bust. This National guarantee means that these bonds will not default you.
These bonds are picked up for investments by banks, mutual funds, Insurers and pension funds to meet short term money needs. They are a part of money market instruments.