What are Indian Government Bonds – Types and Interest Rates
Government bonds in India are debt securities issued by the government of India to finance its fiscal deficit and other developmental activities. These bonds are considered to be among the safest investments as they are backed by the sovereign guarantee of the Indian government. Government bonds offer fixed interest rates and are available in different tenures ranging from a few months to several years. They can be bought and sold on the open market through stock exchanges or through authorised dealers
How Do Government Bonds Work?
Government bonds in India work by the government issuing these debt securities to borrow money from investors. The bonds have a fixed interest rate and a specified maturity period. Investors purchase the bonds and receive regular interest payments until maturity when the principal is repaid. These bonds are traded on the stock exchange, allowing investors to buy and sell them on the secondary market. The Indian government also issues bonds with tax-saving benefits to encourage investment in these securities
What are the Types of Government Bonds in India?
Indian Government Bonds are available for investment by organisations and the public. The government issues several types of bonds with certain features and perks which appeal to different sets of investors. Here are some of the variants of government bonds.
1. Sovereign Gold Bonds (SGBs)
Sovereign gold bonds (SGBs) are government securities denominated in grams of gold that provide an alternative to physical gold. These bonds are issued by the Reserve Bank of India on behalf of the government every 2 to 3 months and have a fixed tenure of 8 years with an exit option after the 5th year. SGBs offer an annual interest rate of 2.5% on the initial investment and are traded on stock exchanges. They also provide capital gains tax exemption if held until maturity.
2. Zero-Coupon Bonds
Zero-coupon bonds are debt securities that are issued at a discount to their face value and do not offer periodic interest payments. Instead, the investor receives the face value of the bond at maturity, which is usually a few years from the date of issuance. These bonds are sold at a discount because they do not pay any interest. Zero-coupon bonds are ideal for long-term investors looking for a fixed return on their investment.
3. Inflation-indexed Bond
Inflation-indexed bonds are government securities that offer protection against inflation. The principal value of these bonds is adjusted to the prevailing inflation rate, which ensures that the investor receives a fixed real rate of return. Inflation-indexed bonds provide a hedge against inflation and could be ideal for risk-averse investors. These bonds have a fixed tenure and pay a periodic interest rate. They can be bought and sold on the stock exchange or through authorised dealers.
4. 7.75% Government of India Savings Bond
The 7.75% Government of India Savings Bond is a fixed-rate bond issued by the government of India. These bonds have a maturity period of 7 years and offer a fixed interest rate of 7.75% per annum payable semi-annually. They are available to resident individuals, HUFs, and trusts. These bonds are not tradable in the secondary market and can only be redeemed at maturity. The interest earned on these bonds is taxable.
5. Floating Rate Bonds (FRBs)
Floating rate bonds are debt securities that have a variable interest rate. The interest rate on these bonds is linked to a benchmark rate, such as the repo rate, and is reset periodically. This ensures that the bondholders receive a market-related rate of interest. Floating rate bonds are ideal for investors looking for a fixed income investment with minimal interest rate risk. These bonds have a fixed maturity period and can be traded on the stock exchange.
6. Fixed-rate Bonds
Fixed rate bonds offer a fixed rate of interest throughout their tenure. The interest rate on these bonds does not change, providing investors with a predictable income stream. Fixed rate bonds are ideal for risk-averse investors looking for a steady stream of income. These bonds have a fixed maturity period and can be traded on the stock exchange.
Features of Government Bonds
1. Guaranteed by the Indian Government
Government bonds in India are issued by the Government of India and are backed by the sovereign guarantee of the Indian government, making them among the safest investments.
2. Fixed Interest Rate
Many types of Indian government bonds offer a fixed rate of interest, which provides investors with a predictable income stream throughout the tenure of the bond.
3. Different Tenures Available
Government bonds are available in different tenures ranging from short-term to long-term to suit investor preferences.
4. Tradable on Stock Exchanges
Government bonds can be bought and sold on the open market through stock exchanges or authorised dealers, making them a liquid investment option.
5. Low Default Risk
The sovereign guarantee of the Indian government ensures that the default risk associated with government bonds is low, making them a safe investment option.
6. Tax-saving Benefits
Some government bonds offer tax-saving benefits to investors, making them an attractive investment option for those looking to save on taxes.
7. No Credit Risk
Unlike corporate bonds, government bonds do not carry any credit risk as they are backed by the government.
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Why Invest in Government Bonds?
Debt securities like bonds have a lower risk measure than stocks. Government bonds are one of the most secure forms of investment attributed to their sovereign guarantee. They generally pay an interest amount monthly, quarterly or annually, which becomes a stable source of income for an investor. This provides an opportunity for risk-averse investors to earn regular income against a one-time lump sum investment.
What are the Best Government Securities in India?
1. Government Bonds
These are fixed-income securities issued by the Government of India that offer a fixed rate of interest and are available in different tenures. They are backed by the sovereign guarantee and are considered one of the safest investment options.
2. Treasury Bills
These are short-term debt securities issued by the Government of India with a maturity period of less than one year. They are considered very low-risk and could offer a higher return than a savings account.
3. State Government Loans
These are bonds issued by state governments to raise funds. They could offer a slightly higher return than government bonds and are still considered relatively safe.
4. Treasury Inflation-Protected Securities (TIPS)
These are government securities linked to the inflation rate, which provides protection against inflation. They are a good option for investors who want to hedge against inflation.
5. Sovereign Gold Bonds
These are government-issued bonds linked to the price of gold. They offer investors an alternative to holding physical gold and provide an opportunity to earn interest on their investment.
Overall, government securities in India offer a range of options for investors who are looking for a safe and stable investment option. It’s important to consider your investment objectives, risk tolerance, and investment horizon before choosing the best government security to invest in.
What are the Risks Associated with Government Bonds?
While government bonds are generally considered a safe investment option, there are still some risks associated with them. Here are some of the key risks to be aware of:
1. Interest Rate Risk
If government bond interest rates rise, the value of existing bonds may decrease, as investors may prefer to invest in newer, higher-yielding bonds.
2. Inflation Risk
If inflation rises, the real value of the returns earned on government bonds may decrease.
3. Credit Risk
Although government bonds are considered to be low-risk investments, there is still a small risk that the government may default on its payments, especially in times of economic distress.
4. Liquidity Risk
Government bonds may not always be easily tradable, which could be a problem for investors who need to sell them quickly.
5. Exchange Rate Risk
Foreign investors who buy Indian government bonds are exposed to exchange rate risk, as fluctuations in the exchange rate can impact their returns.
How to Buy Government Bonds in India?
Investors can purchase Government securities through various platforms in India. All options to buy G-secs are now primarily online, which has made it easier to trade these bonds.
Government securities are available either directly or as funds and stocks. Investors must have a Demat account to trade Government bonds.
1. Mutual Funds
Investors can invest in G-sec mutual funds. Government bond funds invest in a pool of government-backed securities, which gives an investor exposure to several bonds with a single investment.
Expert fund managers improve the chances of return. However, an investor must analyse a particular fund’s holdings and track record before investing.
2. Direct Purchase
Government securities are available for purchase on direct platforms of the Government, either with the National Stock Exchange (NSE) or the Reserve Bank of India (RBI) Digital platform. Investors can buy a set of bonds through these sites with a registered account when the government issues them.
3. Stock Exchanges
Bonds can also be purchased like stocks through various platforms. Investors buy and sell these bonds, and they can also be traded as options. However, it has certain limitations, and this facility is not available for all bonds. Some G-sec ETFs also offer individual units for trading.
4. Banks
Government bonds can be purchased through commercial banks; however, it is important to have a securities account with the bank.
What Affects the Price of Government Bonds?
Several factors affect the performance and prices of a bond. These elements help investors decide if a bond will be the right investment choice.
1. Credit Ratings
Credit rating agencies provide all bonds with a rating, which determines the performance and risk factors associated with a bond. These ratings affect the price of a bond.
2. Maturity Period
The price of a bond also depends on its remaining duration of maturity. New bonds trade at face value with current interest rates. However, a bond at a different stage of its life cycle might be available for a different price.
The maturity period, in general, also affects the bond’s price. Bonds with shorter maturity are more attractive to investors than longer maturity periods because it ensures liquidity. However, longer maturity ensures more stable returns.
3. Demand and Supply
Bond prices fluctuate depending on supply and demand. This is because these bonds are available depending on the fund requirements of the Government. They only issue bonds as and when they need more funds. This supply chain also creates demand for a bond which in turn affects the cost of the bond.
4. Inflation
All commodities and assets in the market are affected by inflation. This also reduces the price of Government bonds in the market in the long term.
5. Interest Rates
An interest rate of a bond crucially affects its demand and price. Attractive government bond interest rates are in high demand among investors, which increases bond prices.
Best Government Bond Mutual Funds in India in 2023
Here are some of the best gilt mutual funds in India right now, based on their 1-year returns
| Fund Name | 1-YR Annualised | 3-YR Annualised | NAV | Fund Size |
| ICICI Prudential Gilt Fund – Direct | 6.34% | 6.70% | ₹90.50 | ₹2,692.92 Cr |
| SBI Magnum Gilt Fund – Direct | 5.75% | 6.14% | ₹57.47 | ₹4,301.01 Cr |
| Tata Gilt Securities Fund – Direct | 5.20% | 4.80% | ₹71.52 | ₹256.46 Cr |
| Kotak Gilt Investment PF & Trust – Direct | 5.18% | 6.32% | ₹92.35 | ₹1,699.17 Cr |
| HSBC Gilt Fund – Direct | 5.04% | 5.38% | ₹63.02 | ₹231.70 Cr |
| DSP Government Securities Fund – Direct | 4.45% | 5.94% | ₹83.30 | ₹430.18 Cr |
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Who Should Invest in Government Bonds?
- Risk-averse investors, such as retirees, looking for a steady stream of income
- Investors seeking guaranteed fixed returns
- Those who wish to diversify their investment portfolio by adding a low-risk asset class
- Individuals who want to take advantage of tax benefits offered by certain government bonds, such as tax-free bonds.
- Investors who have a long-term investment horizon and can hold the bond till maturity
- Individuals who want to park their surplus funds for a short-term period with a low-risk investment option.
What are the Advantages of Investing in Government Bonds?
These securities have various advantages for an investor and are comparatively safer than corporate bonds. Some of the pros are discussed below:
1. Safe Investment Option
Government securities have a low risk of default. This advantage attracts investors to buy G-secs without any concern of losing their investments. Additionally, these securities have a negligible chance of losing the principal amount as the Government has sufficient cash reserves even in the worst-case scenario.
2. High Liquidity
G-secs have comparatively high liquidity as they are popular among investors and frequently traded through exchanges. Except for certain long-term fixed securities, most Government bonds have high liquidity, which benefits active investors.
3. Stable Returns
Government bonds provide steady and regular returns based on interest and coupon rates. They even offer better returns than fixed deposit accounts.
What are the Disadvantages of Investing in Government Bonds?
A Government bond is a long-term investment and thus has several cons that might be unattractive to active investors. Although these securities are safe and are a good option as strategic investments for diversity, they have certain disadvantages that are important to keep in mind while investing.
1. Risk of Interest Rate
Long-term maturity affects the interest returns of these bonds as they tend to lose value over time. Therefore, in the long run, the relevancy of the bond reduces due to rising inflation.
2. Minimum Income
Government securities are considered safe investments with low market risks; however, they also have low returns. This keeps the investors’ money locked in an investment with a lower-than-average return. This aspect can act as a disadvantage for active or aggressive investors.
Final Word
Government-issued securities are good investment assets that provide steady returns for a long time. Therefore, these are useful debt options for the government to collect funds for public development or other plans. Government bonds are an important element for diversification of investment portfolios and could be effective in saving tax. However, keep in mind that the returns potential is low.
That said, if you’re looking for higher returns potential, you can consider investing in one of the many low-cost index funds offered by Navi Mutual Fund. Investments start at just ₹10, depending on your chosen fund.
Disclaimer: Mutual fund investments are subject to market risks, read all offer documents carefully
FAQs
No, all government bonds are not tax-free. However, certain bonds among the different types of Government bonds available are tax-free investments that yield stable returns. One of the best examples of this are Sovereign Gold Bonds or SGBs.
Government bonds pay fixed returns to their investors over a long period of time. These returns are paid either half-yearly or annually, depending on the agreed terms.
Government bonds are issued by the Central or State Governments in India. These bonds are usually issued to raise funds for public projects or during a liquidity crisis.
Bond yields are returns on the bond securities. You can calculate the yield of a government bond by dividing its coupon payment (annual interest rate of a bond) by the face value of the bond.
Government bonds are guaranteed and backed by a country’s central authority and are thus considered one of the safest investment options for the public. There is minimal to no credit risk with government bonds.
To buy government bonds, you can open a demat account with a registered broker, select the bonds you want to invest in, and place an order with the broker. Alternatively, you can invest in government bond mutual funds through a mutual fund company.
Government bonds could offer higher returns than bank FDs and could be slightly safer too as they come with sovereign backing. However, FDs could be easier to invest in and manage.
Government bonds could offer anywhere from 2.5% to 13%, depending on its type.
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This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.
