A Guide To Investing In G-Secs In India

G-Secs, or government securities, are debt instruments issued by the Indian government to meet its fiscal needs. They are regarded as one of the safest investment options due to their negligible credit risk and sovereign guarantee. The popularity of G-Secs spiked after the Reserve Bank of India (RBI) introduced the 'RBI Retail Direct' scheme in 2021, making it easier for retail investors to buy and sell government securities.

To invest in G-Secs, investors need to open an RBI Direct Gilt account under the RBI Retail Direct Scheme. This account allows individuals to invest in government securities, which can be done through various platforms, such as internet trading systems, mobile apps, or tele-broking services.

G-Secs offer a low-risk investment option, making them attractive to conservative investors seeking fixed income and a diversified portfolio.

Opening a Gilt account

Gilt accounts are a great way to invest in government securities and treasury bills in India. Here is a step-by-step guide on how to open a Gilt account:

Step 1: Choose a Bank

Firstly, you need to choose a bank to open your Gilt account. The Reserve Bank of India (RBI) offers a dedicated domain for investors interested in purchasing government bonds through its Retail Direct Gilt (RDG) account.

Step 2: Meet the Requirements

To open an RDG account with the RBI, you must meet certain requirements:

• You must have a savings account.
• You should have a PAN card issued by the Income Tax Department of India.
• You must provide a valid contact number and email address.

Step 3: Gather Documents

To open a Gilt account, you will typically need to submit the following documents:

• Application form for opening the Gilt account, along with supporting documents.
• Agreement executed on stamp paper (the stamp duty may vary across states).
• Application for opening a savings or current account, if you don't already have one.
• Identity and address proof of the account operators.
• Copy of the PAN card of the operators.
• Board/Trust resolution.

Step 4: Submit Documents

Submit the above documents to your chosen bank. For example, if you choose Federal Bank, you can submit these documents at your nearest branch.

Step 5: Wait for Account Activation

Once your documents are submitted and verified, your Gilt account will be opened and activated.

With a Gilt account, you can invest in government securities, which are considered a safe and risk-free investment option in India. You can also use this account to buy and sell government securities in the secondary market and participate in auctions for direct purchases from the primary market.

How to buy G-Secs

G-Secs, or Government Securities, are debt instruments issued by the central and state governments in India. They are also referred to as government bonds. The money raised by the government through G-Secs is used to fund development projects such as infrastructure and schools.

There are a few steps to follow if you want to invest in G-Secs.

First, you need to open a gilt account. A gilt account is similar to a bank account, but instead of money, it is credited or debited with treasury bills or G-Secs. The Reserve Bank of India (RBI) has stated that investors can open gilt accounts with national banks and the monetary policy regulator.

Once you have a gilt account, you can participate in auctions to buy G-Secs directly from the primary market. G-Secs are issued in the primary market through auctions conducted by the RBI. Depending on your eligibility, you may bid in an auction under Non-Competitive Bidding (NCB) or Competitive Bidding. Institutional investors, such as banks and insurance companies, are eligible to bid competitively. The Non-Competitive Bidding Scheme was introduced to encourage retail investors to invest in G-Secs.

Retail investors can place their orders through the following options under the non-competitive bidding facility offered by NSE:

• Through an NSE Trading Member
• Through the NSE goBID mobile app/web platform

When placing a bid, investors should select only one security at a time and specify the investment amount in terms of face value (with a minimum of Rs.10,000 and in multiples thereof, subject to a maximum limit). Only a single bid per security is permitted.

Other Ways to Invest in G-Secs:

In addition to buying G-Secs directly through the primary market, you can also invest through HDFC Securities’ platforms and a Demat Account. Here are the steps to invest through their Internet Trading System:

• Log in to your account.
• From the top menu, choose ‘IPO/FPO’.
• Choose the specific bond you want to invest in.

You can also invest through the HDFC mobile app by navigating to the IPO section and making an investment. Alternatively, you can call the centralised dealing desk and speak with a tele-broking executive.

Important Considerations:

• G-Secs are considered low-risk investments because they are government-backed and have negligible credit risk.
• The price of G-Secs has an inverse relationship with their yield.
• G-Secs can be traded in the secondary market, providing liquidity to investors.
• When selling G-Secs from a Demat Account after holding them for more than a year, the capital gain is taxed at 10%, and the annual coupon rate is taxed at the marginal rate.

Types of government bonds

Government bonds are an integral part of the global financial system, and India is no exception. The Indian government issues bonds to raise money from the general public to cover its budgetary deficit and infrastructure development initiatives. The issuing government backs these bonds, making them low-risk investments.

Government bonds can be classified into four categories based on two factors: the issuer (central or state government) and tenure (short or long-term). Here are the types of government bonds in India:

• Treasury Bills (T-bills): T-bills are short-term money market instruments issued by the Reserve Bank of India (RBI) on behalf of the central government. They are issued at a discount and redeemed at face value at maturity. T-bills do not provide coupon payments, and their tenures are 91 days, 182 days, and 364 days.
• Cash Management Bills (CMBs): CMBs are short-term instruments launched in 2010 to meet temporary mismatches in cash flow. They have the same features as T-bills but with a maturity period of less than 91 days.
• State Development Loans (SDLs): SDLs are dated securities issued by state governments to fund their fiscal deficits. Interest is paid half-yearly, and the principal is repaid at maturity. They are managed by the RBI and carry a 'sovereign guarantee', making them very safe for investors.
• Dated Government Securities: These are long-term instruments issued by the central government to mobilise funds. They carry either a fixed or floating interest rate, paid at regular intervals on the face value. Their tenure typically ranges from 5 to 40 years.
• Floating Rate Bonds (FRBs): These are debt securities with a variable coupon rate, meaning the interest rate fluctuates based on the benchmark rate.
• Capital Indexed Bonds: These bonds protect an investor's capital against inflation. They promise to inflate the principal amount at a predetermined rate linked to an accepted index of inflation.
• Inflation Indexed Bonds (IIBs): IIBs protect both coupon flows and principal amounts against inflation. They are linked to an index that measures inflation, such as the Wholesale Price Index (WPI) or Consumer Price Index (CPI).
• Bonds with Call/Put Options: These bonds have optionality features, where the issuer can buy back the bond before maturity (call option), or the investor can demand repayment before maturity (put option).
• Separate Trading of Registered Interest and Principal of Securities (STRIPS): STRIPS are created by separating the cash flows of a regular G-Sec. They are traded as separate securities, with each semi-annual coupon payment and the final principal payment sold independently.
• Sovereign Gold Bonds (SGBs): SGBs are unique instruments where investors can invest in gold for an extended period without buying physical gold. They have a fixed tenure of 8 years, with an exit option after 5 years.
• Special Securities: These are not sold to retail investors but to corporations on an ad-hoc basis as compensation for cash subsidies. Examples include oil bonds, fertiliser bonds, and food bonds.

G-Secs vs other investments

G-Secs, or government securities, are debt instruments issued by the Reserve Bank of India (RBI) to meet the government's fiscal needs. They are considered a safe investment option due to their government backing and negligible credit risk. While G-Secs offer a guaranteed return on investment, it's important to understand how they compare to other investment options in India. Here is an overview of G-Secs vs other investments:

G-Secs vs Mutual Funds

Mutual funds are a popular investment avenue in India, and G-Secs form an important element of debt mutual funds. Mutual funds offer diversification and professional management of your investments. While G-Secs are considered safe and provide a guaranteed return, mutual funds may provide higher potential returns but with higher risks. Mutual funds are also more liquid than G-Secs, allowing easier entry and exit. Additionally, mutual funds offer tax benefits if held for more than three years, while G-Secs are taxed at the marginal rate.

G-Secs vs Bank Fixed Deposits (FDs)

Bank fixed deposits are a traditional investment option in India, offering guaranteed returns with low risk. G-Secs are similar in terms of safety and guaranteed returns but may provide higher returns compared to FDs, especially for long-term investments. Additionally, G-Secs are more liquid than FDs, as they can be traded in the secondary market. However, FDs have a higher level of trust associated with them due to their simplicity and the credibility of banks.

G-Secs vs Corporate Bonds

Corporate bonds are debt instruments issued by corporations to raise capital. They typically offer higher interest rates compared to G-Secs but also carry a higher risk. The risk of default is higher with corporate bonds as corporations may face cash flow problems, whereas G-Secs are backed by the government, making them virtually risk-free. Corporate bonds may also have different tax implications compared to G-Secs, and their liquidity can vary depending on the market demand.

G-Secs vs Small Saving Schemes

Small saving schemes, such as post office savings schemes, offer guaranteed returns with low risk. These schemes are backed by the government, providing a level of safety similar to G-Secs. However, G-Secs may offer higher returns, especially for long-term investments. Small saving schemes have a simple structure and are easily accessible, making them attractive to conservative investors. Additionally, small saving schemes may have different tax treatments compared to G-Secs.

G-Secs vs Other Debt Instruments

G-Secs can also be compared to other debt instruments, such as sovereign gold bonds, corporate debt, and debt mutual funds. Each of these instruments has its own risk-return profile and unique features. Sovereign gold bonds offer exposure to gold prices, while corporate debt instruments may provide higher returns but with higher risk. Debt mutual funds offer diversification and professional management but may have higher fees associated with them.

In conclusion, G-Secs are a safe and reliable investment option backed by the government. They offer a guaranteed return and are ideal for conservative investors. However, it's important to consider the investment horizon, risk appetite, and tax implications when comparing G-Secs to other investments in India. Diversification across different asset classes is generally recommended to balance risk and return.

Who should invest in G-Secs

G-Secs are government securities issued by the Central or State governments in India. They are considered a safe investment option due to their negligible credit risk and sovereign guarantee. While they offer lower returns compared to other investments, they are ideal for conservative investors seeking fixed income and capital appreciation.

G-Secs are suitable for investors who want to earn a fixed income on their investment. These investors are typically risk-averse and prefer government-backed investments that provide a surety of return. Additionally, G-Secs can be a good option for those looking to allocate a portion of their portfolio to debt instruments, including equity, fixed-income, and safe-haven assets like gold.

G-Secs are also suitable for investors seeking long-term, low-risk investments. The Indian government offers G-Secs with maturities ranging from one year to 40 years, providing decent returns over longer durations. For example, the 30-year government bond offers a 6.96% annual return, while the 10-year bond provides a 6.37% return.

Furthermore, G-Secs can be an attractive option for investors looking to diversify their portfolios. As they are traded on the secondary market, G-Secs offer liquidity and can help reduce the overall risk factor of an investment portfolio.

Overall, G-Secs are a good investment option for conservative investors seeking fixed income, long-term investments with low risk, and portfolio diversification.

Frequently asked questions