Things to Know Before Investing in Government Bonds

government bonds

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A government bond or a sovereign debt is essentially a debt instrument that is issued by the central or state government of India. It is issued when the central or state government goes through a liquidity crisis and requires funds for infrastructural development.

Since you are interested in investing in government bonds, here are some tips for you to make better investments:

  • Creditworthiness:

The riskiest aspect of a government bond is the default in payment by the government body. The default can be in the form of late payment or even the non-payment of the principal amount at the time of maturity. In order to assess the creditworthiness of a government bond, you can check the ratings given by authorised agencies on a rating scale.

  • Avoid complex bonds:

It is advisable to not buy complex bonds that have a call and put options since it may expose you to newer risks. For instance, a call option allows buyers to buy back the bonds before maturity after a certain period. This may be a disadvantage for you in a declining interest rate environment.

  • Exit options:

It is crucial to evaluate your liquidity requirements before investing in government bonds. Moreover, the maturity period of bonds should also match your desired investment horizon. For example, premature selling of government bonds will lead you to volatility in interest rates.

  • Risk-return balance:

There is no definite rule that decides the exact return a government bond will fetch. The yield depends on the industry and market of the bond. In order to conclude a reasonable figure of returns, you should compare the bond ratings.

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