What are Government and State Government Bonds and how to invest in them?


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Bonds are debt instruments where the investor lends money to a company. The company borrows money at a fixed rate for a specified period of time. This entity can be the government, banks or corporations. Therefore, when the government issues bonds, they are referred to as government bonds. These investments are also known as fixed-income investments.

A government bond is a debt instrument issued by the country’s central and state governments to meet its needs and also to regulate the money supply. When the government needs funds to develop infrastructure and fund government spending, these bonds are often the answer. The government will sell bonds to the public and invite investment.

The government pays the principal and interest according to the clauses specified in the bond on the specified due date. The government issues bonds under the supervision of the Reserve Bank of India (RBI). RBI issues bonds on behalf of the Indian government to finance the budget deficit. In recent years, bonds have been issued to major market players such as corporations, commercial banks and financial institutions.

However, in recent years government bonds have been made available to smaller investors such as retail investors, credit unions, etc. Private investors are also increasingly interested in investments. bite into government bonds. In general, government bonds in India are long-term investment vehicles. These bonds are for a long duration ranging from 5 years to 40 years.

Also, government bonds fall under the broad category of government securities (G-secs). Both the central and state government can issue government bonds. However, the bonds issued by state governments are also called State Development Loans(SDLs).

Types

Below are the different types of government bonds.

Treasury Bills

Treasury bills, also known as T-bills, are short-term government bonds. They will be issued with a term of one year. The government issues these bonds in three categories, namely 91 days, 182 days and 364 days. Investors do not receive any coupon payments. However, the difference between the face value and the discounted value is the profit for the investors.

Cash Management Bills

These bonds are short-term securities and very flexible. They are issued according to the government’s funding needs. Therefore, holding the bond mainly depends on temporary liquidity needs. In general, they must be less than 91 days. It is very similar to treasury bills. The bond comes with different interest rates. Investors benefit from the interest paid on these bonds.

Dated government bonds

Referred to as “dated” because of the standard expiry date. The Reserve Bank of India auctions these bonds. The following are types of dated government papers.

Fixed Rate Bonds Government

bonds of this type have a fixed coupon rate throughout the life of the bond. In other words, the interest rate remains constant throughout the life of the investment, regardless of fluctuating market rates.

Floating Rate Bonds

These bonuses continue to fluctuate throughout the investment. Interest rate changes are made at intervals announced prior to the issuance of the bond. For example, a floating rate note (FRB) has a pre-announced interval of 6 months. restarts every six months during the term of office.

Zero-Coupon Bonds

As the name suggests, zero-coupon bonds have no coupon payments. The income from these bonds results from the difference between the issue price and the repayment value. In other words, these bonds are issued at a discount and are redeemed at par. Also, these bonds will not be auctioned but created through existing securities.

How to Invest?

Retail investors can buy bonds directly by registering with the exchanges or by buying through their Demat (broker) account. To buy bonds directly through the exchange, there is a web application called “NSE goBID”. To buy government bonds through this platform, do the following:

  1. Click New Investor Sign up and then sign up to the NSE goBID platform.
  2. Make Offer: The investor must select the Treasury bill/bond available for subscription.
  3. Make an online payment from the bank account linked to the Demat account.
  4. The investor receives bonuses directly on the Demat account.

Through this platform, investors can invest in government bonds and dated bonds issued by the Indian government. These bonds offer maximum security as they include an obligation to pay interest and repay principal.

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