How to invest in Government Bonds – Let’s Figure it Out
A GOVERNMENT BOND is a debt instrument issued by the State and Central Government of India. The issuance of this bond comes up when there is a liquidity crisis & requires funds for the development of an infrastructure. Basically, the government bond in India is a contract between the issuer & investor.
Investor loves to invest in those assets, whose guiding principle will be SLR i.e. Safety, Liquidity and Return. Investors always look for those investments which are safest in term of the returns. In terms of safety, Government bonds are one of the safest investments to be made, as it is issued and backed by the government.
A government bond is basically a loan taken by the government on which it pays interest on a fixed date. This loan has a maturity period, at which point the government redeems the bond by paying back the principal amount. Depending upon the sort of government bond, the tenure is between 90 days and 40 years. Let’s look at the types of Government bonds:
Treasury bills are short term bonds with a maturity period of one year. These bonds are generally used in three categories, 91 days, 182 days and 364-day bills. However, they don’t pay interest to the investor, the difference between the face value and discounted issue is basically measured as profit.
- Cash Management Bills: These are short term securities that are issued when needed. They are quite flexible. The tenure issue date is largely dependent upon the cash needs of the government.
- Dated Government Securities: These are long term securities or bonds of the government which carries a fixed or floating interest rate. These securities are issued by the government for mobilizing funds.
To make investment in either of them, an investor needs to know that Indian bond market is mainly consist of two categories i.e. Government bonds and corporate bonds.
What are the risks associated with Government bonds?
Government bonds are a secure investment as the government can always print more money to meet its debt. An investor will always get back its money when the bond matures. The picture is more complicated, there are certain risk always associated with government bonds, one need to watch out for such as interest rates, inflation and currencies.
Interest Rate Risk:
This is the potential risk that every bond investor fear. A rising interest rate will cause the value of your bond to fall as bond rates are inversely proportional to interest rate. So, in that scenario, it’s better to invest somewhere else.
There is a high chance that rising inflation will cause the value of your bond to fall. If the rate of inflation rises over the coupon rate of your bond, then your investment will lose your money in real terms.
Currency risk applies if you buy a government bond that pays out in a different currency rather than your reference currency. The fluctuating exchange rates may see the value of your investment drop with time.
Furthermore, you can figure out more about mutual funds and a bit more:
*Disclaimer: investment in securities market are subject to market risks, read all the related documents carefully before investing