INVESTING STRATEGIES - GOVERMENT SECURITIES

Investing in government securities (G-secs)

The asset class that is highly liquid, tax exempt and offers decent returns.

A demat account is rquired for investments in government securities (G-secs).

G-secs can be bought either in the primary market (through RBI auctions) or from the secondary market

In the secondary market, you can buy G-secs through banks, primary dealers or even brokers. You can also invest in G-secs through gilt funds.
Sovereign debt (G-secs) is among the safest fixed income investments, as they are backed by government credibility..

They are also highly liquid. You can enter and exit the markets anytime at market-related rates..


Tax benefits.
In case of G-secs’ returns, no tax is deducted at source.
As per the Income-tax Act, additional tax benefits are provided in case of G-sec investments under section 80L. .G-secs to be pledged as collateral in case of borrowing from banks.

Like all bonds, they are also priced in the secondary market on the basis of their term of maturity and prevailing interest rates (in a tightening interest rate environment, the price of the bond falls and viceversa).

G-secs are available for tenure of three months (counting T-bills) to 30 years. As an individual, you have the option of either actively trade or invest in G-secs.

Group of investors trading in G-secs should bet on longer dated paper as the interest environment is softening.

The longer the term of maturity of G-secs, the more sensitive they are to changes in interest rates. A G-sec maturing in 2036 will have a higher price appreciation than the one maturing in three months from now if RBI were to lower interest rates further.
Where to buy from ?

Primary market:

Buying done through auctions. The transaction is done through banks or primary dealers. Cannot go directly to RBI.

For amount less than Rs 2 cr, investor has to put a non-competitive bid. For more than Rs 2 cr, a competitive bid can be made.
Secondary market:

Transaction takes place in the OTC market. Bid and ask prices are quoted at which investor can buy/sell the security.

Types of government securities

Zero coupon bonds:
Bonds that do not pay any interest but are instead issued at a deep discount to face value and then can be redeemed at par by the investor.

Dated securities:
These generally carry fixed interest rate and are fixed maturity securities. Mostly carry semi-annual coupon.

Partly paid stock:
Stocks where investors are not required to pay the full contractual amount and payment of principal amount is made in installments over a given time frame.

Floating rate bonds:
Bonds that have variable interest rate with a fixed % pegged over a benchmark rate. There may be a cap and a floor rate attached thereby fixing a maximum and minimum interest rate payable on it.

Bonds with call/put option:
Bonds in which bond holders have the option of selling (put option) the bond to the government or the government has the option of buying back (call option) the bond from the holder, even before it is due for redemption.

Capital indexed bonds:
Bonds where interest rate is a fixed as a % over the wholesale price index and hence is an efficient hedge against inflation.