A case for investing in Government securities

• Government securities are considered among the safest investment options due to the sovereign guarantee attached to them.
• Most brokers allow trading of existing G-secs on the secondary market through their platforms.
• Investing in G-sec-focused mutual funds allows a diversified portfolio within Government securities and low-ticket investments.

Government securities, commonly known as G-secs, are debt instruments issued by the Government of India to raise capital. These securities serve as a way for the government to borrow money from the public or institutions. G-secs come with fixed interest rates and predetermined maturity dates.

They are considered among the safest investment options due to the sovereign guarantee attached to them, ensuring repayment of the principal amount and interest upon maturity. The credit risk on G-secs is thus minimal.

Government bonds also boast high liquidity and can be traded easily in the secondary market. This flexibility provides an opportunity to earn improved returns on the bonds and allows for exiting at any desired time before the maturity date as well.

How G-secs work

Investing in g-secs involves purchasing these bonds at face value, and the interest, also known as the coupon, is paid periodically, typically semi-annually or annually, until the maturity date.

The interest rates on g-secs are influenced by various factors, including market demand, inflation, and the monetary policy of the Reserve Bank of India (RBI).

Consequently, the prices of G-secs fluctuate inversely with the prevailing interest rates in the market. When interest rates rise, the value of existing G-secs falls, and vice versa.

These securities are traded in the primary and secondary markets. In the primary market, they are directly issued by the government through auctions, while in the secondary market, they are bought and sold among investors.

How to invest

G-secs are available in various tenures, ranging from short-term (Treasury bills) to long-term (Government bonds).

The Retail Direct Scheme by the Reserve Bank of India (RBI) rolled out in 2021 enables individual investors to directly invest in government securities without requiring intermediaries such as brokers or mutual funds.

The NSE goBID platform allows retail investors to participate in auctions for new G-sec issuances through your broker. It offers a non-competitive bidding process, meaning you specify your desired amount, and if your bid is accepted, you'll get allotted securities at the cut-off price.

Most brokers allow trading of existing G-secs on the secondary market through their platforms. This offers flexibility to choose specific securities and exit positions when needed.

Steps to invest

`Here are the steps to invest in G-secs.

1. Log in to your brokerage account
2. Navigate to the bids section: Locate and click on the "Bids" tab or section within the platform.
3. Select government securities: Once in the Bids section, find and select the option for "Govt. securities."
4. Initiate the bid: Look for the option to "Place bid" and click on it.
5. Enter bid Amount: Input the specific amount you wish to bid for the government securities.
6. Finalise the bid: After entering the amount, confirm the bid by clicking on the "Place bid" button.

Investing in G-secs through the mutual fund route

One can also take the mutual funds route to invest in G-secs. “Investing in G-sec focused mutual funds allows a diversified portfolio within Government securities and low ticket investments,” says Marzban Irani, chief investment officer, fixed income, LIC Mutual Fund.

This can be suitable for passive investors or those seeking exposure without actively managing individual bonds.

“It is always easy for investors to buy subscription or redemption requests in a mutual fund, compared to looking out to buy or sell securities in the fixed income market. Also, one may buy and hold but in between prices can fluctuate. Many people may not understand the drivers of those price fluctuations,” says Pankaj Pathak, fund manager, fixed income, Quantum AMC.

Interest rate risks

G-secs do carry one particular risk, that of interest rate fluctuations in the broader market. When rates rise, existing G-Secs with lower rates lose value compared to newer securities offering higher rates. Conversely, falling rates increase demand for older G-Secs, potentially raising their value.

Longer-term G-Secs are more prone to rate change risks than short-term ones. Investors holding G-Secs until maturity aren't affected by price fluctuations but can lose potential earnings if rates rise after purchase.

“A sudden increase in interest rate can impact return. So one is advised to invest into G Secs only for long-term goals,” says Abhishek Kumar, founder and chief investment advisor at SahajMoney, a financial planning firm.

Is this a good time to invest?

Government securities (G-Secs) typically attract conservative investors seeking a steady income from their investments. Moreover, investors often include G-Secs in their portfolio's debt allocation, which comprises diverse assets like equities, fixed-income instruments, and safe havens such as gold.

At present, we are at the peak of the interest rate hike cycle. Developed economies like the US are expecting rate cuts going ahead in 2024.

On the domestic front, the core inflation seems to be under control.

“The interest rates are holding steady and might even start going down from the second half of next year,” says Kumar.

So, going forward, retail investors can expect to improve their returns on G Sec investments.

Disclaimer: The content on this website is for informational purposes only and should not be construed as investment advice. We recommend readers consult certified, qualified and registered advisors for professional and personalised financial advice.