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Hitting The G-Spot
By Satya Prakash Goel  
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Investing in government securities has been considered to be the arena of domestic and foreign institutional investors. Although, Government Securities (G-secs) is the safest fixed-income investment for retail investors, it is still not the most preferred one. Unawareness regarding the availability of these securities to retail investors and regarding the process of buying the same are the prime reasons for such dismal  participation of retail investors in buying G-secs.

Decoding G-secs
G-secs stand for government securities, usually bonds and treasury bills, issued by the central or state government. Treasury bills or t-bills are short term instruments (less than one year maturity) and government bonds are of more than one year. Government also issues saving instruments such as NSC, saving bonds etc. and special bonds such as oil bonds, Food Corporation of India bonds, power bonds etc. Government bonds are issued through an auction. The auction calendar is announced well in advance on leading newspapers and RBI’s website as well, inviting retail and institutional investors to bid for these securities.
These securities usually carry a fixed-interest rate (coupon) or floating interest rate that is paid half-yearly upto maturity. The tenor of these bonds can be upto 30 years. Government bonds carry a common nomenclature that contains the coupon (interest rate), name o the issuer and maturity year of the bond. For example, the current 10-yr benchmark bond’s name is: “8.83% GS 2023” which means bond has a coupon of 8.83% per annum, it’s a Government Stock, and would mature in the year 2023. If there are two bonds issued by the same issuer, having the same coupon and year of maturity, one of them would also have the month of maturity in their name e.g. “6.05% GS 2019 FEB”.
Government bonds are considered the safest investments because if you hold these securities from issue date till the date of maturity, you do not face any sort of risk at all. These bonds pay interest regularly and the last interest payout is along with repayment of principal amount. These bonds are backed by the Sovereign or the Government of India itself and are a part of the government’s borrowing programme. Thus they do not carry any default risk which is prevalent in other corporate bonds. The liquidity in the G-sec market is very high and thus one can instantly sell these securities in the secondary market whenever they wish without incurring much cost. 

How To Invest In G-Secs
G-secs are issued through an auction on an electronic platform. The auction is either price based or yield based i.e. investors either bid the price they are ready to pay or the yield they expect from the bonds. Institutional buyers compete under ‘competitive bids’ category by placing their bids specifying yield / price. With a view of protecting retail investors who lack the skill and knowledge required in order to bid, RBI has included bids from retail investors into a separate category known as ‘non-competitive bids’. Retail investors just need to fill in the number of bonds they want to apply keeping the yield/price for their bid blank. The cut-off price/yield at the end of the auction is applicable for all the investors – both institutional and retail. 5% of all central government issues is generally reserved for such ‘non-competitive’ bids in order to encourage retail participation. 10% of the issue size is reserved for retail investors in case of state government securities.
Investors have the option of holding government bonds in either physical or demat form as required in the case of equity shares. Holding in demat form is however recommended as it is the safest and most convenient way of investing. For investing in G-secs you need to open a gilt account with one of the Primary Dealers. Primary dealers are RBI approved intermediaries who directly deal in government securities on your behalf. There are around 20 primary dealers in India, while some are banks, some are stand-alone primary dealers. The prominent primary dealers are IDBI Gilts, ICICI Sec PD, PNB Gilts, SBI DFHI, Citibank, Standard Chartered, BoB, among others. 
Investing in long-term government bonds makes a lot of sense at current yields in today’s scenario. Yield of ~9% p.a. guaranteed over next 10 years or more with complete safety of capital is a good proposition, especially for retired  people, as interest rates are expected to go down in the next 3 years. So keep an eye on future RBI bond auctions, get your account formalities completed, and be ‘gilt-ready’! 
Happy investing!


The author is Director, Bonanza Portfolio Limited

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G-secs | RBI | |
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