G-Secs can be an ideal investment option for risk-averse individuals. The debt instruments are backed by the government and offer guaranteed returns on the investment. There are many different types of securities issued by the Reserve Bank of India (RBI) on behalf of the government. The four main categories include:
Both central and state governments issue dated G-Secs. However, securities issued by state governments are known as SDLs. What exactly are dated securities? Let’s find out.
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Dated G-Secs are long-term securities or bonds issued by the government with fixed or floating coupon or interest rates. The interest rate is paid half-yearly on the investment’s face value, and the principal amount is repaid on a predetermined date. The securities are known as dated securities, as the maturity date is expressed clearly in these debt instruments. They can have a tenure ranging from five to forty years.
RBI’s Public Debt Office (PDO) is the registry or depository of dated G-Secs. The PDO is responsible for every activity, from issuing securities to the repayment of the principal amount and the coupon payments.
Investors can purchase or sell dated G-Secs via RBI’s Negotiated Dealing System-Order Matching (NDS-OM), NDS-OM-Web, stock exchanges, and Over-the-Counter (OTC).
Here’s the list of the different types of dated G-Secs:
As the name suggests, fixed-rate bonds have a fixed coupon or interest rate. Hence, the coupon rate remains constant throughout the tenure, irrespective of market volatility.
Unlike fixed-rate bonds, floating-rate bonds do not come with a fixed coupon rate. The coupon rate is changed at pre-announced intervals, which are usually half-yearly or yearly.
The principal amount and the interest rate are linked to the inflation index in this type of dated securities. These could be indexed as per the Consumer Price Index (CPI) or the Wholesale Price Index (WPI). This protects your investment amount and the coupon amount against inflation.
The coupon rate in capital-indexed bonds is fixed over an acceptable inflation index. It makes the face value or the principal amount secure against inflation.
SGBs allow you to invest in gold without holding it physically. The prices of SGBs are linked to gold price (commodity price). These are denominated in units of one gram of gold. The maturity period of these bonds is eight years. However, premature redemption is allowed after the fifth year from the date of issue.
These types of dated G-Secs are issued with call-and-put options. The call option allows the issuer to repurchase or buy back the bond from the investors. On the other hand, the put option allows you to sell or put the bond to the issuer. This category of dated securities can either have one of the options or both options.
STRIPS is short for Separate Trading of Registered Interest and Principal of Securities. In these G-Secs, the principal amount and half-yearly coupon payments are separated and can be held or traded as separate securities or individually.
Zero coupon bonds have no coupon rate. These bonds are issued at a discounted value and redeemed at par or face value. The difference between the issue and redemption price is considered the return earned by the bondholder.
These savings bonds were rolled out by the government in 2018. As the name suggests, the interest rate for the bonds is 7.75%. They can be held by:
The returns earned on such bonds are taxable under the Income Tax Act, 1961.
Special securities are securities issued by the government to fertiliser companies, oil marketing companies and food companies instead of cash subsidies. They usually have a more extended maturity date and a higher coupon rate. The beneficiaries can divest the bonds in the secondary market to raise funds.
Dated G-Secs are one of the most secure investment options due to the negligible risk of default backed by a sovereign guarantee. Investing in these securities to fulfil your long-term goals can be an ideal choice if you are risk-averse and wish to diversify your overall investment portfolio.