Government Securities

Introduction

• A Government Security (G-Sec) is a tradable instrument issued by the Central Government or the State Governments. 
• It acknowledges the Government’s debt obligation. 
• Government securities are short term (usually called treasury bills, with original maturities of less than one year) or long term (usually called Government bonds or dated securities with original maturity of one year or more). 
• In India, the Central Government issues both, treasury bills and bonds or dated securities while the State Governments issue only bonds or dated securities, which are called the State Development Loans (SDLs). 
• G-Secs carry practically no risk of default and, hence, are called risk-free gilt-edged instruments.

Characteristics of Government Securities

• Besides providing a return in the form of coupons (interest), G-Secs offer the maximum safety as they carry the Sovereign’s commitment for payment of interest and repayment of principal.
• They can be held in book entry, i.e., dematerialized/ scripless form, thus, obviating the need for safekeeping. They can also be held in physical form.
• G-Secs can be sold easily in the secondary market to meet cash requirements.
• G-Secs can also be used as collateral to borrow funds in the repo market.
• Securities such as State Development Loans (SDLs) and Special Securities (Oil bonds, UDAY bonds etc) provide attractive yields.
• G-Sec prices are readily available due to a liquid and active secondary market and a transparent price dissemination mechanism.

Features of Government Securities

• The majority of the government securities are issued at their face value and no premium is added to the price.
• Government securities guarantee fixed income to the investors.
• The liquidity in the secondary market is high as compared to the primary market. Therefore, retail investors get high liquidity in the secondary market and you can directly sell in the secondary market. 
• No tax is deducted at source in the case of government securities. 
• The premium, face value, and rate of interest are fixed at the time of issuance and they can not be changed once the security is issued. 
• Investors can store government securities in dematerialized format. 
• In the case of redemption, the securities are redeemed at face value. 
• The maturity tenure ranges between 2-30 yrs. 

Risk Associated with G-Secs

• Credit risk: There is always a risk of non-payment of the principal amount and the interest rate. Although, in the case of government securities, the risk is almost negligible. But, investors should be diligent, and always check third-party ratings before making any investment. 
• Inflation risk: When inflation is rising, the low interest on the bonds does not attract a lot of investors. Therefore, inflation affects the purchasing power and viability of these instruments. However, there are inflation-linked bonds that increase the principal and interest amount of the investor when inflation is rising.