The bond market has flourished rapidly over time. There are varieties of bonds in the market and one of the less risky ones is government bonds. Like corporations and individuals, even governments need funds to sort out the public issues in the society or economy. Also known as G-Secs, these bonds raise extra funds from the public in return for interest payments and full capital return on the date of maturity. Investors can buy government bonds offline and online as well.
All the funds received from the public can be used for building roads and schools, investing in public projects, and refurbishing purposes. But, how to invest in government securities? Before jumping into it, let’s comprehend how you can buy government bonds.
How To Invest in Government Bonds?
Whenever government funds shrink, they issue bonds to the public. Investors can buy government bonds directly from the market. The current yield for a 10-year government bond is 7.244% as of May 2022. Though these numbers differ over time, they deliver sound returns to the investors. But, how to buy government bonds? One can buy government bonds in two distinct ways:
- Invest via GILT mutual funds
- Creating a trading Demat account with a bank
GILT Mutual Funds
This is one of the most common ways of investing in government bonds. Here, the funds are invested in bonds issued by the state and central governments. Since investors are offering money to the government as a form of loan, they are paid interest followed by capital appreciation upon maturity period. Unlike corporate bonds, government bonds have zero-credit risk as the chances of default are almost null. Additionally, there’s capital protection as the investments are made into government-backed securities. These kinds of bonds are ideal for risk-averse investors.
Direct Investment
This is an alternative way to invest or buy government bonds. All the investor needs is a trading and Demat account, which can be opened at any bank or NBFC in India. Once the account is created, the investor can use the login credentials and initiate trading and investing in multiple government securities. Simply register on the stock exchange, and place your order to buy government bonds.
Participate In Bidding
Investors can buy government bonds from the stockbroker as well by partaking in non-competitive bidding (NCB). Retail investors can place bids online on the goBID web portal or the NSE goBID mobile application. The yield will be determined based on the bids received from the investors. To participate in this auction/ non-competitive bidding, you need to open a current account/subsidiary general ledger account.
What Are the Best Government Securities to Buy in India?
Government has myriad ways to get finance from the public to fund their projects. Investors can buy government bonds in the following forms:
Treasury Bills
These are short-term government securities issued by the government. Also commonly known as T-Bills, the maturity time frame for these government securities lies for 91 days,182 days, and 365 days respectively. People buy government bonds to claim interest payments and capital protection. However, in this case, investors get zero interest from buying the treasury bills. Alternatively called zero-coupon securities, they are issued at discount and redeemed at par on reaching maturity. The difference between the discount purchase and par receipt is the gain earned by the investor.
State Government Loans
Investors looking to buy government bonds can explore this option. The state government issues dated securities to the public to meet the deficit needs of the budget. Issuing these bonds would augment the finances in the pockets of the state government to build the necessary public requirements. Investors can buy government bonds or SGLs in the secondary market. The first issue is made in the primary market in the auction form orchestrated by the Reserve Bank of India.
Treasury Inflation-Protected Securities (TIPS)
If inflation is hitting the economy to a real-low stage, buying these government securities will secure you from plummeting losses and increase purchasing power. The term of the Treasury Inflation-Protected Securities (TIPS) is available for 5, 10, and 30 years. This type of bond aids investors to maintain equilibrium despite the changes in the price.
Investors receive interest on TIPS post every six months and the value is determined as per the existing par value of the security. In other words, the TIPS value changes according to the alterations in the CPI inflation value. Woefully, the value of TIPS nosedives during deflation. But, upon maturity, investors get either the original par value or beyond that but not less. As far as taxes go, TIPS levy taxes because investors earn interest. You have to remember that the TIPS bond value surges according to the adjustments in the inflation rates.
What Are the Brokerage Charges on Government Bonds?
The government levies broker fee on the bonds issued to the investors. According to the RBI, the brokerage charges on government bonds will be 6 paise per 100 rupees. Since the minimum value of the investment is Rs 10000, the brokerage charges will be Rs 6. Plus, they’ll be 18% GST upon the overall brokerage induced on the bond.
