Government securities have always been regarded as an investment option only suitable for banks, financial institutions, and corporations. These securities are among the best investment options for ordinary investors.
G-secs refer to government securities or, in other words, loan or capital issued by the government. The biggest advantage associated with this is the safety of capital and return. Thus, government securities are an important aspect of securing investment through a reliable source. In February 2021, the Reserve Bank of India allowed retail investors to directly invest in G-secs. In this post, we assess the usefulness and impact of government securities on business financing and investment.
Who Issues Government Securities or G-Secs?
The Government securities issued by the government of India, state development loans, and treasury bills are all instruments that are quite similar in their nature of reliability. These are issued by the Reserve Bank of India, acting on behalf of the Government. Primary market refers to the capital market where securities are bought and sold for the very first time. Once traded here, these can then be listed for sale or purchase in the secondary market, where retail companies, individual investors etc can buy them.
Advantages of Holding G-secs
The following are the major advantages of investing in government security for your business
- Security of investment – since these bonds are guaranteed by the government and issued by the Reserve Bank of India they are one of the most secure investments that you can make.
- Low yields in fixed deposits and savings accounts – Due to the pandemic, the current interest rates have moved downwards for both savings account and fixed accounts. This makes the yield offered on government securities lucrative.
- Entry and exit are easy – these bonds can be purchased on the secondary market easily by way of a bidding process facilitated by the National Stock exchange. The exit for an investor is also easy, as there is a ready market for government bonds in the secondary market.
- Fixed-income investment – since there is a specific rate of interest payment, which is unconditional, the business can be assured of a steady income across multiple years until maturity.
- No TDS – there’s no tax deduction at the source for the interest on such bonds.
- Collateral – G-secs can be used as collateral to borrow funds.
- Demat form – They can be held in dematerialised form, thus there is no need for physical ownership papers. Transactions can easily be completed online
Competitive and Non-competitive Bidding of Government Securities
Institutional investors dealing in finance, banking companies, financial institutions, mutual funds, and other financial entities are allowed to purchase government securities from the primary market by way of competitive bidding, or auction.
Other investors – such as companies looking for investment, individual retail investors, etc. can purchase these securities from a process called ‘non-competitive bidding’. Eligible investing companies can then apply for a certain amount of securities in the bidding process.
Recent Change by RBI in February 2021 – Now Investors Can Directly Purchase Government Securities
Through a recent notification, the RBI has allowed non-competitive bidding in primary markets. This means that companies and individuals looking for investment can directly purchase these bonds through the stock market.
Who Decides the Price of G-secs?
The price of G-secs is decided by the Reserve Bank of India. The bidders or bidding companies are allotted securities at an average price of auction decided by the RBI every week.
What Is the Interest Rate Offered on the G-secs?
The interest value is currently around 6-7% on the holding value of a 10-year government bond. While this is comparatively lower than yields from other investments such as mutual funds, the risk is very little.
Would You Have to Pay Tax on G-secs?
- Yes, most government securities are not tax-free. There are other bonds of the government, especially those floated for infrastructure purposes. There are Rural Electrification Corporation Ltd (RECL bonds) or Railway bonds.
- If the government securities are sold within one year of purchase, a short term tax liability arises – making them taxable as per your current slab rate.
- If the government securities are held for a longer period, the gains are taxed at 10% as long term capital gains.
Frequently Asked Questions
1. How can G-secs Be sold?
The government securities can be sold in the secondary market either through an anonymous online trading mechanism on an exchange or through the over-the-counter sale.
2. Can the price of G-secs change?
Like all financial instruments, the yield and prices of government securities are also subject to change. This is large because of changes in interest rates, inflation, liquidity, foreign exchange and flow of money and other criteria.
3. What are the risks associated with G-secs?
While government securities are the safest investment since the government is not likely to default. There are still some risks that you must know. Liquidity risk refers to not being to find a buyer when you need to sell these (if being sold before maturity). Such investment also carries an opportunity risk, when interest rates offered by other options (fixed deposits etc) are higher. High inflation can also cause bond yields to reduce.