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Building a Secure Financial Future with Government Securities

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Published Date: 28 Aug 2024Updated Date: 27 Dec 20246 mins readBy MOFSL

Government securities are debt instruments issued by the central and state governments to raise capital from the public. The funds generated through these securities are used by the government for routine projects, significant infrastructure developments and even military expenditures.

Varieties of government securities G-secs come in several forms, like Treasury Bills (T-Bills), Government Dated Securities (G-Secs) or Government bonds, State Development Loans (SDLs), Inflation-Indexed Bonds (IIBs), and Sovereign Gold Bonds (SGBs).

What makes government securities so special is that they have low risk and are supported by the government's creditworthiness. As a result, the interest rates on these securities are generally lower than those offered by more volatile investments.

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For investors, government securities are viewed as a stable part of a diversified portfolio and offer a balance between risk and return.

Government securities are available to banks, financial institutions, primary dealers in negotiated dealing systems, corporations, individual investors, and foreign investors.

These securities can be acquired through auctions conducted by the Reserve Bank of India. The auction process, similar to applying for an IPO, involves bidding based on yield or price. The government securities market is where these transactions occur.

Once the auction is completed, the government securities are listed on the exchange, providing investors with the flexibility to sell or trade them at any time. To increase accessibility and encourage broader participation, SEBI allows the trading of government securities through stock exchanges or the NDS-OM platform.

Investing in government securities is becoming increasingly viable and let's find out why.

1. Safety & Stability: Government securities are among the most secure investment options available, as they are fully supported by the government’s credit. These securities provide consistent returns with fixed interest payments and guarantee the repayment of the principal at maturity. 

2. Diversification: Investing in various government securities allows for diversification within the fixed-income and debt asset classes, making G-Secs one of the most secure and stable options. It offers a range of maturity periods, spanning from under 91 days to as long as 40 years. This flexibility allows you to structure your investments in a laddered approach.

3. Inflation Adjusted Returns: Government bonds offer protection from Inflation. These bonds include mechanisms to adjust both the principal and interest amounts in line with changes in the inflation index, ensuring that the investor receives real returns. Likewise, capital-indexed bonds adjust the principal value according to an inflation index to protect the capital from losing value due to inflation. This means that the bond's face value at maturity is increased by the same rate as the inflation growth over the bond's term.

4. Capital Preservation: Government securities are ideal for investors focused on preserving their capital over time. They can be compared to fixed deposits for their ability to safeguard capital. However,  fixed deposits only insure amounts up to Rs 5 lakhs against bank default, whereas G-secs offer full security since governments rarely default.

5. Income Generation: Government bonds that offer regular coupon payments can provide a steady income stream, making them ideal for individuals without a consistent income. These bonds can prove to be a valuable asset when planning a retirement portfolio and provide financial stability over time.

6. Tax Benefits: These bonds offer investors the chance to earn annual pre-fixed interest. The interest earned is tax-free, which helps investors boost their savings. Like other bonds, the principal amount is paid back at maturity.

However, the maturity of these bonds ranges from 10 to 20 years. These bonds generally offer lower interest rates compared to other fixed-income investments. It is a secure choice for those seeking a dependable, long-term investment with tax benefits. 

7. Liquidity and Marketability: Central government securities are highly liquid, making it easy to buy or sell them in the secondary market. They can also be pledged as collateral for loans. Financial institutions often use these bonds to meet their Statutory Liquidity Ratio (SLR) obligations. They can be swiftly sold in the secondary market, with transactions settling the day after the trade on a T+1 settlement period.

In summary, government securities are a compelling investment option for a wide range of investors, offering a blend of safety, stability, income generation, and additional benefits like tax advantages and high liquidity.

 

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Disclaimer: The stocks, companies, or financial instruments mentioned in this blog are for informational purposes only and should not be considered as investment recommendations. It is advised to consult with your financial advisor before making any investment decisions. Investment in securities markets are subject to market risks, read all the related documents carefully before investing. Investors are strongly encouraged to carefully read the risk disclosure documents prior to participating in market-related investments or trading activities. Due to the volatile nature of financial markets, no guarantees can be made regarding investment returns. Motilal Oswal Financial Services Ltd. does not offer any assured returns on market-linked securities. Please note that past performance of stocks or indices is not indicative of future results.
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