Introduction
When you think of investments, safety and stability usually come to mind first, especially in uncertain times. If you are looking for safe investments, Treasury Bills (T-Bills), State Development Loans (SDLs) and government bonds could be a safe option, after all, these are government-backed investments with low risk. But how do you choose between these diverse types of government securities? This guide will explain what treasury bills are, what state development loans are, and what government bonds are, as well as the differences, to help you decide which suits you best.
What Are Treasury Bills?
Treasury Bills (T-Bills) are short-term securities issued by the Reserve Bank of India (RBI) on behalf of the central government. T-Bills are a helpful solution if you have some temporarily excess cash and are looking for a secure place to park it for the near term. T-Bills are issued with maturities of 91, 182 or 364 days. T-Bills are ideal for temporarily parking idle funds when you won't need immediate access, such as while planning near-term expenses.
Unlike other securities, T-bills don't require interest payments, but investors buy them at a discount and then receive the security's par value at maturity. For example, you can buy a T-bill security with a par value of ₹10,000 for ₹9,800, and when it matures, you will receive ₹10,000, with the difference as your return on the investment. Due to their short tenure and support from the government, T-bills are risk-free and have high liquidity if you need to sell them in the secondary market. T-bills are a good option if you are a conservative investor or want to access your funds quickly.
What Are State Development Loans?
State development loans (SDLs) are securities issued by state governments to finance projects like infrastructure or welfare. When you buy an SDL security, you essentially lend money to a state government and receive a promise to be paid back with interest. SDLS usually have a maturity ranging between 5 and 10 years and would be treated as a medium- to long-term investment.
SDLs offer semi-annual interest, or coupon payments, to provide income to your account on a schedule. SDLs, like T-bills, are backed by state governments. SDLs carry marginally greater risk than T-bills and G-secs because of the financial health of the various states. If anything, their yields are usually greater than G-secs to compensate for the additional risk of possibly being less secure. SDLs can also be sold in the secondary market, although there may be some liquidity impacts because they are less liquid than T-bills or G-Secs.
What Is a Government Bond?
Government bonds are often referred to as G-Secs. A G-sec is a long-term government security issued by the central government; these depend on the specific security term. A G-Sec could be anywhere from 5 years to 40 years. You would be interested in the G-sec for long-term goals such as retirement plans and wealth preservation. Specifically, G-secs offer paid interests semi-annually, like SDLs, so that you will have a predictable cash flow into your bank account.
In terms of G-secs, these are face value government-backed securities with a very low probability of default. They are highly liquid as they are actively traded in the secondary market, so they would be a simple exit if you need to cash out. Government Securities have lower yields than State Development Loans security, but are extremely safe investments. If you are a long-term investor looking for a secure investment yielding low or moderate returns, G-Secs would probably be more suitable for investment over SDLs or T-Bills.
The Comparison
To determine which option is more suitable for you, you must consider the differences:
Tenure: Treasury Bills are short-term investments (up to 1 year), suitable if you are looking to make very short-term investments; State Development Loans typically have a range of 5-10 years, which would balance the needed timeframe and specific returns; Government Securities have ranges of 5 to 40 years to relate cash flow and planning to longer time frames.
Risk: Government securities like T-Bills and G-Secs are backed by the central government and carry minimal risk. While issued by state governments and mainly considered safe, SDLs have slightly higher credit risk.
Returns: Treasury bills offer the lowest returns due to their shorter term; state development loans, which yield higher returns given that they do reflect state risk, offer higher yields; and government securities offer moderate returns or even moderate predictable returns.
Liquidity: T-bills and G-Secs are very liquid in their secondary markets. SDLs are fluid, but less so, and tradable.
Interest Tax: You do not get periodic interest with T-bills, as you earn through the discount rate. You will get semi-annual coupons for both SDLs and G-Secs, which might suit you if you want to make your investment work to provide income to yourself regularly.
Taxation is similar for all three; interest is taxed according to your income slab, and capital gains taxation would apply if you sold and realised gains before maturity. Interest is taxed as per your slab. Capital gains tax may apply if you sell in the secondary market before maturity. Indexation benefits on long-term capital gains no longer apply to most debt instruments, as per the changes in the Budget 2023.
Conclusion
You can acquire these securities via the RBI's e-Kuber platform during primary auctions or in the secondary market via brokers. Mutual funds or exchange-traded funds (ETFs) that focus on government securities would provide a more straightforward way to invest without entering the respective markets yourself.
Before investing, you should know your time frame, risk tolerance, and income requirements. You will also need to be aware of interest rate cycles, as rising interest rates typically lead to lower bond prices in the secondary market. You are choosing to invest in T-bills, SDLs, or G-secs, which are all stable instruments backed by the government, and are the best asset classes for your diversified portfolio.
Similar Reads: What are the types of Government securities? | Exploring Government Securities in India | Should you buy Government bonds directly or through Mutual funds | Everything you need to know about Treasury Bills
What Is a Government Bond?
Government bonds are often referred to as G-Secs. A G-sec is a long-term government security issued by the central government; these depend on the specific security term. A G-Sec could be anywhere from 5 years to 40 years. You would be interested in the G-sec for long-term goals such as retirement plans and wealth preservation. Specifically, G-secs offer paid interests semi-annually, like SDLs, so that you will have a predictable cash flow into your bank account.
In terms of G-secs, these are face value government-backed securities with a very low probability of default. They are highly liquid as they are actively traded in the secondary market, so they would be a simple exit if you need to cash out. Government Securities have lower yields than State Development Loans security, but are extremely safe investments. If you are a long-term investor looking for a secure investment yielding low or moderate returns, G-Secs would probably be more suitable for investment over SDLs or T-Bills.
The Comparison
To determine which option is more suitable for you, you must consider the differences:
Tenure: Treasury Bills are short-term investments (up to 1 year), suitable if you are looking to make very short-term investments; State Development Loans typically have a range of 5-10 years, which would balance the needed timeframe and specific returns; Government Securities have ranges of 5 to 40 years to relate cash flow and planning to longer time frames.
Risk: Government securities like T-Bills and G-Secs are backed by the central government and carry minimal risk. While issued by state governments and mainly considered safe, SDLs have slightly higher credit risk.
Returns: Treasury bills offer the lowest returns due to their shorter term; state development loans, which yield higher returns given that they do reflect state risk, offer higher yields; and government securities offer moderate returns or even moderate predictable returns.
Liquidity: T-bills and G-Secs are very liquid in their secondary markets. SDLs are fluid, but less so, and tradable.
Interest Tax: You do not get periodic interest with T-bills, as you earn through the discount rate. You will get semi-annual coupons for both SDLs and G-Secs, which might suit you if you want to make your investment work to provide income to yourself regularly.
Taxation is similar for all three; interest is taxed according to your income slab, and capital gains taxation would apply if you sold and realised gains before maturity. Interest is taxed as per your slab. Capital gains tax may apply if you sell in the secondary market before maturity. Indexation benefits on long-term capital gains no longer apply to most debt instruments, as per the changes in the Budget 2023.
Conclusion
You can acquire these securities via the RBI's e-Kuber platform during primary auctions or in the secondary market via brokers. Mutual funds or exchange-traded funds (ETFs) that focus on government securities would provide a more straightforward way to invest without entering the respective markets yourself.
Before investing, you should know your time frame, risk tolerance, and income requirements. You will also need to be aware of interest rate cycles, as rising interest rates typically lead to lower bond prices in the secondary market. You are choosing to invest in T-bills, SDLs, or G-secs, which are all stable instruments backed by the government, and are the best asset classes for your diversified portfolio.
Similar Reads: What are the types of Government securities? | Exploring Government Securities in India | Should you buy Government bonds directly or through Mutual funds | Everything you need to know about Treasury Bills