Fixed Income FAQs
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What are G-secs?

Government securities (G-secs) or gilts are sovereign securities, which are issued by the Reserve Bank of India (RBI) on behalf of the Government of India (GOI). The GOI uses these funds to meet its expenditure commitments.

What are Treasury bills?

Treasury bills are short-term money market instruments, which are issued by the RBI on behalf of the GOI. The GOI uses these funds to meet its short-term financial requirements of the government. The salient features on T-Bills are:

  • These are zero coupon bonds, which are issued at discount to face value and are redeemed at par.
  • No tax is deducted at source and there is minimal default risk.
  • The maximum tenure of these securities is one year.

What are the different types of government securities?

Following are the different types of government securities:


  • Dated securities:

    These securities generally carry a fixed coupon (interest) rate and have a fixed maturity period. e.g. an 11.40% GOI 2008 G-sec. In this case 11.40% is the coupon rate and it is maturing in the year 2008. The salient features of Dated Securities are:

    • These are issued at the face value.
    • The rate of interest and tenure of the security is fixed at the time of issuance and does not change till maturity.
    • The interest payment is made on half yearly rest.
    • On maturity the security is redeemed at face value.

  • Zero coupon bonds:

    These securities generally carry a fixed coupon (interest) rate and have a fixed maturity period. e.g. an 11.40% GOI 2008 G-sec. In this case 11.40% is the coupon rate and it is maturing in the year 2008. The salient features of Dated Securities are:

    • The tenure of these securities is fixed.
    • No interest is paid on these securities.
    • The return on these securities is a function of time and the discount to face value.

  • Partly Paid Stock:

    In these securities the payment of principal is made in installments over a given period of time. The salient features of Partly Paid Stock are:

    • These types of securities are issued at face value and the principal amount is paid in installments over a period of time.
    • The rate of interest and tenure of the security is fixed at the time of issuance and does not change till maturity.
    • The interest payment is made on half yearly rest.
    • These are redeemed at par on maturity.

  • Floating Rate Bonds:

    These types of securities have a variable interest rate, which is calculated as a fixed percentage over a benchmark rate. The interest rate on these securities changes in sync with the benchmark rate. The salient features of Floating Rate Bonds are:

    • These are issued at the face value.
    • The interest rate is fixed as a percentage over a predefined benchmark rate. The benchmark rate may be a bank rate, Treasury bill rate etc.
    • The interest payment is made on half yearly rests.
    • The security is redeemed at par on maturity, which is fixed.

  • Capital indexed bonds:

    These securities carry an interest rate, which is calculated as a fixed percentage over the wholesale price index. The salient features of Capital Indexed Bonds are:

    • These securities are issued at face value.
    • The interest rate changes according to the change in the Wholesale price index, as the interest rate is fixed as a percentage over the wholesale price index.
    • The maturity of these securities is fixed and the interest is payable on half yearly rests.
    • The principal redemption is linked to the Wholesale price index.

Who can invest in government securities?

Entities registered in India including banks, financial institutions, Primary Dealers, Partnership firms, Institutions, Mutual funds, Foreign Institutional Investors, State governments, Provident Funds, Trusts, Research organizations, Nepal Rashtra Bank and individuals can invest in government securities.

What are the advantages and disadvantages of investing in gilts?


Advantages

  • The main advantage of investing in G-secs is that there is a minimal default risk, as the instrument is issued by the GOI.
  • G-Secs, especially dated securities, offer investors the opportunity to invest in very long term debt (at times with maturity over 20 years), which is usually not available from the private sector.
  • Although some issues of G-secs tend to be illiquid, there is adequate liquidity in most other issues. Infact, buying and selling from/to a primary dealer can take care of the liquidity risk.

Disadvantages

  • The main disadvantage of investing in G-secs is the same as in the case of investing in any other debt instrument i.e. possibility of higher interest rates and inflation. While higher interest rates will lead to an erosion in value of the bond, a rise in inflation will eat into the real return (though this can be taken care of by buying capital indexed bonds for example).

What are the tax benefits by investing in gilts?

There is no tax deducted at source and the investor can avail tax benefit u/s 80L i.e. Rs 3,000/-

What is the minimum amount for investing in gilts?

The minimum amount for investing in gilts varies depending on the primary dealer e.g. In case of IDBI Capital markets who is a primary dealer the minimum amount for investing in gilts is Rs 10,000/-.

Can investor hold these instruments in a demat form?

Reserve Bank of India maintains a Subsidiary General Ledger (SGL) Account for holding and trading gilts and treasury bills in dematerialised form. Banks and Primary dealers are allowed to open SGL accounts with RBI. These primary dealers in turn are permitted to offer the facility of Constituent SGL account to other non bank clients to hold these securities in a demat form.

What are Gilt accounts?

Accounts maintained by investors with the Primary dealers for holding their Government securities and Treasury bills in the demat form are know as Gilt accounts. The salient features of Gilt accounts are:

  • It is like a bank, which debits or credits the holders account on withdrawal or deposit of the money. Similarly in a gilt account the holder's account is debited or credited on the sale or purchase of the securities.
  • The account holder receives a statement at periodic intervals showing the balance of securities in his account.
  • All the securities are maintained in demat mode, which can be converted into physical mode whenever required by the gilt account holder.