Types of Government Securities in India?

Types of Government Securities in India?

Government securities are investment products issued by the both central and state government of India in the form of bonds, treasury bills, or notes.
They are generally issued for the purpose of refunding maturity securities for advance refunding of securities that have not yet matured and raising fresh cash resources.
However, they carry minimal risk and are called risk-free gilt-edged instruments. So let’s look at the different types of government securities in India:

    There are several types of government securities offered by the Reserve Bank of India. Let’s look at the given below:

  • Treasury Bills
  • Treasury bills, also called T-bills, are short term government securities with a maturity period of less than one year issued by the central government of India.
    Treasury bills are short term instruments and issued three different types:
    1) 91 days
    2) 182 days
    3) 364 days
    Several financial instruments pay interest to you on your investment; treasury bills do not pay interest because they are also called zero-coupon securities.
    These securities do not pay any interest; instead, they are issued at a discount rate and redeemed at face value on the date of the maturity.
    For example a 91 day T-bill with a face value of Rs. 200 may be issued at Rs.196, with a discount of RS. 4 and redeemed at face value of Rs. 200.
    However, RBI performs weekly auctions to issue treasury bills.

  • Cash Management Bills (CMBs)
  • Cash management bills are new securities introduced in the Indian financial market. The government of India and the Reserve Bank of India introduced this security in the year 2010.
    Cash management bills are similar to treasury bills because they are short term securities issued when required.
    However, one primary difference between both of these is its maturity period. CMBs are issued for less than 91 days of a maturity period which makes these securities an ultra-short investment option.
    Generally, the government of India use these securities to fulfil temporary cash flow requirements.

  • Dated Government Securities
  • Dated Government securities are a unique type of securities because they either have fixed or a floating rate of interest also called the coupon rate.
    They are issued at face value at the time of issuance and remains constant till redemption.
    Unlike treasury and cash management bills, government securities are recognized as long-term market instruments because they provide a wide range of tenure starting from 5 years up to 40 years.
    The investors investing in dated government securities are called primary dealers. There are nine different types of dated government securities issued by the Government of India given below:
    1) Capital Indexed Bonds
    2) Special Securities
    3) 75% Savings (Taxable) Bonds, 2018
    4) Bonds with Call/Put Options
    5) Floating Rate Bonds
    6) Fixed Rate Bonds
    7) Special Securities
    8) Inflation Indexed Bonds
    9) STRIPS

  • State Development Loans
  • State development loans are dated government securities issued by the State government to meet their budget requirements.
    The issue is auctioned once every two weeks with the help of the Negotiated Dealing System.
    SDL support the same repayment method and features a variety of investment tenures. But when it comes to rates, SDL is a little higher compared to dated government securities.
    The major difference between dated government securities and state development loans is that G-Securities are issued by the central government while SDL is issued by the state government of India.

  • Treasury Inflation-Protected Securities (TIPS)
  • Treasury Inflation-Protected Securities (TIPS) are available based on five, 10 or 30 year term periods. These securities deliver interest payments to all users every six months.
    TIPS are similar to conventional treasury bonds, but it comes with one major difference. The same principle is issued during the entire term of the bond in a standard treasury bond.
    However, the par value of TIPS will increase gradually to match up with the Consumer Price Index (CPI) to keep the bond’s principle on track with inflation.
    If inflation increases during the year, there will be an increase in the security value during that year. It means you will have a bond that maintains its value throughout life instead of a bond that’s worthless after maturity.

  • Zero-Coupon Bonds
  • Zero-coupon bonds are generally issued at a discount to face value and redeemed at par. These bonds were issued on January 19th 1994.
    The securities do not carry any coupon or interest rate as the tenure is fixed for the security. In the end, the security is redeemed at face value on its maturity date.

  • Capital Indexed Bonds
  • In these securities, the interest comes in a fixed percentage over the wholesale price index, which offers investors an effective hedge against inflation.
    The capital indexed bonds were floated on a tap basis on December 29th 1997.

  • Floating Rate Bonds
  • Floating rate bonds does not come with a fixed coupon rate. They were first issued in September 1995 as floating rate bonds are issued by the government.

  • What are government securities?
  • Government securities are called investment products issued by the both central and state government of India in the form of bonds, treasury bills, or notes.

  • What is the major difference between dated government securities and state development loans?
  • The major difference between dated government securities and state development loans is that G-Securities are issued by the central government while SDL is issued by the state government of India.

  • What are Zero-Coupon bonds?
  • Zero-coupon bonds are generally issued at a discount to face value and redeemed at par. These bonds were issued on January 19th 1994.

  • When was floating rate bonds issued?
  • The floating rate bonds were first issued in September 1995 by the government.

Final Thoughts

There are several types of government securities in India, and an investor can choose their desired securities for their portfolio.
In addition, these securities will provide fixed or guaranteed income to help the investor align with the risk factor in your investment portfolio.
In the end, buying government securities can turn out to be a great way to make both investing and portfolio better.