Government Bonds India: Meaning, Types & How to Invest | 5paisa (2024)

Introduction

Government Bonds in India are a vital addition to investors’ portfolios. Investing builds wealth over time and ensures a burden-free financial future. When allocating their capital, investors must diversify across numerous asset classes. Bonds are the most popular investment instruments with low risk and steady return.

These factors depend on the issuer of the bonds and their ability to pay regular interest and repay the principal amount at maturity. Government bonds in India are ideal and safe investment instruments.

What are Government Bonds in India?

Government bonds in India are investment instruments the Central Government of India issues under the debt category for investors to earn steady returns based on government bond interest rates. These high-yield government bonds raise capital for various purposes, such as infrastructure development.

The government promises to pay interest to the subscriber based on the government bonds interest rates in return for the investment made. The bondholders receive interest on a set date based on the specified government bond India interest rate, also called the coupon rate.

Government bonds in India fall under the government securities class (G-Sec) and are long-term investment instruments, ranging between 5-40 years. These bonds are backed by the creditworthiness and guarantee of the Government of India.

Types of Government Bonds in India?

The government issues several types of government bonds or debt securities to raise funds for various purposes. These bonds differ in nature, coupon rate, maturity date, principal amount, etc. Here is a detailed government bonds in India list to make an informed investment decision for the safest debt instruments

● Fixed Rate Bonds

The Government issues these bonds at a fixed interest rate. This fixed amount is based on the percentage value of the principal amount at regular intervals to the bondholders. The government bond India interest rate remains constant until the bond matures, irrespective of fluctuating market conditions.

Fixed-rate bonds can be issued for one year to thirty years or more. The longer the tenure, the higher the interest rate offered to compensate for the longer lock-in period.

● Floating Rate Bonds

Floating rate bonds are government bonds subject to periodic fluctuations in the rate of return. These bonds have a fixed coupon rate but base the government bonds' interest rates on the prevailing market conditions.

The government changes the interest rates of these bonds, thus impacting the rate of return for the bondholders. For example, while issuing these bonds, the government may specify a pre-announced interval of 6 months, which means the interest rate is reset every six months. Some floating rate bonds have two components–a base rate and a fixed spread.

● Sovereign Gold Bonds

Under the supervision of the Reserve Bank of India, the government issues sovereign gold bonds to allow investors to invest in gold. These bondholders do not need to buy and store gold physically but can benefit from the domestic gold rate increase.

The price of these bonds is directly related to the domestic gold rates. RBI uses the simple average of the closing price of 99.99% pure gold three days before the bond's issuance to determine its nominal value. SGBs have a fixed maturity period of 8 years, but holders can redeem them after the fifth year on interest payment dates.

● Inflation-Indexed Bonds

Also known as inflation-linked bonds or capital-indexed bonds, these bonds are fixed-income securities issued by the Indian government or corporations. The motive behind issuing these bonds is to protect against inflation by adjusting the principal value of the bond in line with the inflation rate.

The government periodically adjusts the principal value of such bonds according to the Consumer Price Index (CPI). They provide a fixed interest rate to the bondholders over the inflation adjustment. This government bond interest rate is paid semi-annually on the face value.

● 7.75% GOI Savings Bonds

The government introduced the 7.75% GOI Savings Bonds in 2018 to replace the 8% Savings Bond. As the name suggests, the interest rate of such bonds is 7.75%. These bonds are non-transferable, non-negotiable and are issued only in the investor's name.

They have a tenure of 7 years, and the investor receives the interest annually. The minimum investment amount is Rs 1,000 with no upper limit.

● Put and Call Option Bonds

Put and call option government India bonds come with the feature of buy-back from the issuer or sell-back for the bondholder. The government can buy back (call) the bonds anytime before maturity. Further, the bondholders have the right to sell (put) them back to the government anytime before maturity.

However, both parties can only execute the transactions on the date of interest disbursal. This step is possible after five years from the issuance date.

● Zero coupon Bonds

Also known as discount bonds or deep discount bonds, zero coupon bonds are debt securities that do not pay periodic interest payments like traditional bonds. Instead, the government issues these bonds at a discount to their face value and pays no interest during their term.

The investor earns a return by purchasing it at a discounted price and receiving the face value at maturity. Zero coupon bonds are typically long-term investments ranging from 10 to 30 years. These bonds are subject to interest rate risk. If interest rates increase after the purchase, the bond value will decrease. On the other hand, if interest rates fall, the value of the bond will rise.

Advantages of Investing in Government Bonds?

Government bonds in India are one of the safest debt securities backed by the Indian government.

● Sovereign Guarantee: Government bonds in India provide a sovereign guarantee to investors for risk and assured returns. As the Indian government backs these bonds, it is highly unlikely that the bonds may default on interest payment and principal repayment.

● Steady Income: Government bonds in India allow investors to invest in a low-risk debt instrument to earn steady income until maturity. The regular interest rate factor can be a good source for investors to save and build a future corpus.

● Liquidity: One of the best benefits of investing in government bonds is liquidity. They can be easily bought and sold in the secondary market. High liquidity makes them a convenient investment option for investors who may need to liquidate their assets quickly.

Disadvantages of Investing in Government Bonds

Although government bonds in India come with a sovereign guarantee and high liquidity, there are certain disadvantages.

● Lower Income: The Indian government ensures that the bonds come with the lowest possible risk and tackle market fluctuations. Hence, other than the 7.75% GOI Savings Bond, government bonds offer low coupon rates.

● Inflation Risk: While inflation-indexed bonds protect against inflation, other types of government bonds in India are vulnerable to inflation risk. If the inflation rate rises above the interest rate paid by the bond, the real value of the investment will decline.

● Currency Risk: Government bonds denominated in foreign currencies are subject to currency risk, which means that fluctuations in exchange rates can impact the value of the investment.

● High Tenure: Most government bonds come with a high maturity tenure ranging from 5-40 years. Some investors may feel that the bonds can lose relevance amid rising inflation.

Who Should Invest in Government Bonds?

Government bonds are suitable for investors depending on their goals, risk tolerance, and financial situation. Bonds are one of the safest investment instruments investors can utilise for effective diversification.

Apart from G-secs, almost all other market-linked investment instruments are volatile as market factors highly affect their prices and return potential. For example, if the equity market is going through a bear phase, the investor may incur huge losses with lower liquidity.

Risk-averse investors who do not want to invest in high-risk, high-return investment instruments can look towards investing in government bonds in India. The investors can allocate their capital for long-term government-issued debt securities, providing them with a lower but guaranteed steady income. Government bonds can also help investors who are looking to diversify their portfolio by providing exposure to a different asset class than stocks or real estate.

Furthermore, retirees and pensioners relying on a fixed income stream to cover their living expenses may find this a suitable investment option. The steady income from government bonds can help them meet their income needs without taking on excessive risk.

How To Invest In Government Bonds In India?

A majority of experienced investors ensure their portfolios have government bonds for a low-risk, steady-return approach. However, new investors are often confused about how to buy government bonds in India. Here is the process of buying government bonds in India.

● Open A Demat Account: The Indian government lists the G-Secs on various stock market exchanges. Individuals can open a demat and trading account with a registered stockbroker and buy and sell bonds through the accounts.

● GILT Mutual Funds: Using GILT mutual funds, investors can put their money in bonds issued by the central and state governments. Like other mutual funds, these funds are managed by professional fund managers who make investment decisions on behalf of investors.

What Are the Brokerage Charges on Government Bonds?

Issuance and management of government bonds is an extensive task that requires filing for all the relevant licences and creating the prospectus. It allows investors to know factors such as face value, interest rates, maturity, etc. Hence, the Indian government levies a brokerage charge on the bonds issued to the general public.

As per the rules set by the RBI, the brokerage charges on government bonds are 6 paise per 100 Rs. For example, if an investor wants to buy government bonds in India with a principal value of Rs 10,000, the brokerage charges will be Rs 6. Furthermore, GST at 18% is also applicable to the overall brokerage.

Conclusion

Government bonds can be a low-risk investment option offering a steady income stream and diversification benefits. These bonds can be suitable for investors with different goals and risk profiles, allowing them to expand their portfolios effectively. However, since there are multiple bonds the Indian government issues, it is important to analyse each and choose the one that matches the investment strategy.