Types of Government Securities in India

Bonds serve as a widely embraced avenue for governments and corporations seeking to raise debt. Various types of government securities pledge the repayment of a principal amount at maturity along with periodic interest throughout the bond’s tenure. The assurance of returns from these instruments is underpinned by either collateral or the issuer’s creditworthiness.

Regarding the spectrum of bonds available, those floated by entities or NBFCs are often viewed as less secure than those issued by robust, multinational corporations. Standing as the epitome of security are government bonds, backed by the full faith and credit of the government. In India, various government bonds are tailored to different needs and preferences. Dive in as we explore the multiple types and nuances of government securities in the country, providing you insights into the multifaceted world of these secure investment options.

What are Government Securities (G-Sec)

Government securities are debt instruments issued by the government. When you buy a government security, you lend your money to the government in return for a periodic interest payment at a pre-decided coupon rate. The loan has a specified tenure and is redeemed at the maturity date. 

Different types of government bonds with differing interest rates, tenure, and other features exist. Let’s learn about these types of government securities in India in detail.

Benefits of Government Securities

The following are the benefits of investing in government securities in India:

1. Risk-Free Investment Instrument

G-secs are guaranteed by the government of India. The possibility of a default, therefore, is practically zero. So, if you are a risk-averse investor, these investment avenues are perfect for you.

2. Inflation-Adjusted Returns

Inflation index bonds have provisions to adjust the principal and the interest amount as per the movement in the inflation index to ensure actual returns. Similarly, capital-indexed bonds have the principal amount adjusted as per an inflation index to prevent the capital from reducing in value due to inflation. That is, the face value at redemption is increased by a factor of the inflation increase during the bond’s duration.

3. Highly Liquid

Government securities are one of the most liquid investment instruments in the country, right next to cash, demand drafts, and cheques. You can even pledge them to get loans. Financial institutions can use these instruments to fulfil their SLR (Statutory Liquidity Ratio) requirements. They can be sold quickly in the secondary market with a settlement period of t+1 (settlement is completed one day after the transaction date).

4. Portfolio Diversification

You can use government securities to diversify the risk of your portfolio. By being risk-free, they reduce the overall risk exposure of your investment portfolio. They come with various maturity periods, from less than 91 days to 40 years. Therefore, you can ladder your investments using these.

5. Excellent Source of Regular Income

Government securities paying regular coupon payments can become a steady income source for those who need one. People without a stable income can invest in these bonds to ensure the stability of funds. These bonds are also an excellent tool for planning a retirement portfolio.

Types of Government Bonds in India

There are various types of Government bonds in India, which are as follows:

• Treasury Bills
• Cash Management Bills
• Dated Government Securities (G-Sec)
• Fixed-Rate Bonds
• Floating Rate Bonds (FRBs)
• Zero-Coupon Bonds
• Capital Index Bonds
• Inflation Indexed Bonds
• Bonds with Call or Put Option
• STRIPS
• Sovereign Gold Bonds
• 7.75% Savings (Taxable) Bonds
• State Development Loans(SDLs)

Treasury Bills

Treasury bills or T-bills are money market instruments that are short-term debt instruments issued by the Government of India. Treasury bills are zero coupon securities and pay no interest. Instead, they are issued at a discount and redeemed at the face value at maturity. For example, You can buy a T-bill with a face value of Rs. 100 at a discounted price of, let’s say, Rs. 98.2. At its maturity, your profit will be Rs. (100-98.2) = Rs.1.80.

Also known as T-bills, these come with three different maturity periods:

• 91 days
• 182 days 
• 364 days

The RBI issues 91-day T-bills every Friday and 182 and 364-day T-bills every alternate Wednesday.

Cash Management Bills

They are among the relatively newer types of government securities and were issued in India for the first time in 2010. The primary aim behind their issuance was to meet temporary mismatches in cash flow for the government. CMBs are similar to T-bills but usually have a tenure of less than 91 days.

Dated Government Securities

Dated government securities are issued with a specific maturity date. They have a fixed or floating coupon rate, with maturity usually ranging from 5 to 40 years. Following are the ten types of Dated Government Securities: 

Fixed-Rate Bonds

These are bonds on which the coupon rate is fixed for the bond’s entire life (i.e. till maturity). Most Government bonds in India are issued as fixed-rate bonds.

Floating Rate Bonds (FRBs)

The coupon rate on these bonds is linked to a market benchmark rate. Therefore, it keeps floating depending on the changes in linked rates. For example, RBI issued floating rate bonds in 2020, with an interest rate spread over the interest rate on the National Savings Certificate by 35 bps. If the NSC rate is 6.8%, the floating rate for the bond will be (6.8 + 0.35)% = 7.15%. The floating rate is reset at pre-announced intervals (say, every six months or one year). 

Zero-Coupon Bonds

These bonds do not offer any coupon payments to the investor. The bonds are sold at a discount to their face value. The only return you get from these bonds is the difference between the discounted issue price and the face value at redemption.

Capital Index Bonds

These are the bonds where the capital or principal amount is linked to a pre-decided index for inflation. Examples of such indexes include  include the Consumer Price Index (CPI) Wholesale Price Index (WPI). Hence, if the CPI goes from 100 to 102, the corresponding principal repaid would also increase by 2%. This protects the invested amount against inflation.

Inflation Indexed Bonds

In these bonds, the principal and the interest amount are linked to an inflation index, like WPI or CPI. Thus, it guarantees actual returns to investors, protecting the portfolio against erosion due to inflation. 

Bonds with Call or Put Option

• Bonds with a Call Option:

In these bonds, the issuer has the right but not the obligation to buy back the bond at a specific date and rate. For example, the first G-Sec having both call and put options, viz. 6.72% GS 2012 was issued on July 18, 2002, for a maturity of 10 years, maturing on July 18, 2012. The optionality on the bond could be exercised after the completion of 5 years tenure from the date of issuance on any coupon date falling after that. This means the government could buy back the bond at face value after five years.

• Bonds with a Put option:

Here, the investor has the right but not the obligation to sell back the bond to the issuer at a specific date and rate. In the above example, the bonds issued by the government were putable after five years at face value.

• Special Securities:

Under the market borrowing program, the Government of India also issues, from time to time, special securities to entities like Oil Marketing Companies, Fertilizer Companies, the Food Corporation of India, etc. (popularly called oil bonds, fertiliser bonds and food bonds, respectively). Compared to dated securities, these have a slightly higher coupon rate and a longer tenure.

STRIPS

Separate Trading of Registered Interest and Principal of Securities (STRIPS) are securities created by separating the individual cash flows of various government securities. For example, a government bond with a face value of Rs. 100 and a coupon rate of 6.4% can be divided into Coupon STRIP of 3.2 and Principal STRIP of 100.

As you can see, STRIPS are created from existing securities and not issued through auctions.

• Treasury Inflation-Protected Securities (TIPS)

Consider TIPS like a special savings account. When the cost of things (inflation) increases, TIPS’s value increases too. The U.S. government ensures you won’t lose buying power by adding a bit extra whenever prices rise. They pay you a little twice a year, and when the term is up, you get back either the original amount or its increased value, whichever is higher.

• Tap Stocks

Imagine a company with shares that people like and buy a lot. The company might decide to make more of the same shares to sell – that’s Tap Stocks. It’s great for the company to earn more, but if you already own some shares, the value of each might decrease a bit.

• Partly Paid Stocks

Buying Partly Paid Stocks is like paying for something in instalments. You pay a portion of the total price now and agree to pay the rest later, like a layaway plan for stocks! But paying the remaining amount when it’s due is essential, or you could lose the stock and pay extra fees.

Sovereign Gold Bonds

These are unique instruments, with their nominal price linked to the simple average closing price of gold of 999 purity published by the India Bullion and Jewellers Association in the last three working days of the week preceding the subscription.

The Bonds are issued in denominations of one gram of gold and multiples thereof. The minimum investment in the Bond shall be one gram with a maximum subscription limit of 4 kg for individuals. The tenure of these bonds is eight years, and they can be prematurely redeemed after five years from the date of issue. The Bonds shall bear interest at the rate of 2.50 per cent (fixed rate) per annum on the nominal value. The bond will be tradable on Exchanges if held in demat form. It can also be transferred to any other eligible investor.

7.75% Savings (Taxable) Bonds

As the name suggests, these are bonds with a fixed coupon rate of 7.75% per annum, paid half-yearly for a maturity period of 7 years from the date of issue. You can choose the option of cumulative or non-cumulative interest payment. The interest on non-cumulative bonds is payable to the investors on a half-yearly basis from the date of issue. In the case of cumulative bonds, the half-yearly interest will be compounded and credited to the investor’s account. It will be payable to the investor at the time of maturity of the bond.

State Development Loans

State Development Loans are bonds issued by different state governments to meet their need for funds. SDLs are Dated Securities with semi-annual interest payments and principal redemption at maturity. SDLs are traded electronically on the RBI-managed NDS-OM (Negotiated Dealing System-Order Matching) and in the voice market (NDS).

Final Words

Hope the above insights have helped you understand what types of government securities are available to investors. They offer the most risk-free returns, are highly liquid and can be sold conveniently in the secondary market. Due to this, these are excellent tools for portfolio diversification.
However, as with any other bond, longer-term government securities may carry an interest rate risk. You must understand the pros and cons of investing in each and add them to your portfolio based on your financial goals.