| |
Securities issued by the Government of India, to finance the expenditure of the Government, which are Issued through auctions and private placement by the RBI on behalf of the Government of India. The payment of interest are at regular intervals (mostly six monthly). The repayment of maturity and payment of interest are done by the RBI on behalf of the Government of India through its Public Debt Office which takes care of issue, interest payment and maturity repayment. Presently Government securities are issued for tenor from 1 year to 30 years.
The Benefits of investing in a Government Security are:
- Safety: The Zero Default Risk is the greatest attraction for investments in Government Securities. It enjoys the greatest amount of security possible, as the Government of India issues it. Hence they are also known as Gilt-Edged Securities or 'Gilts'.
- Fixed Income: During the term of the security there is likely to be fluctuations in the Government Security prices and thus there exists a price risk associated with investment in Government Security. However, the return on the holding of investment is fixed if the security is held till maturity and the effective yield at the time of purchase is known and certain. In other words the investment becomes a fixed income investment if the buyer holds the security till maturity.
- Convenience: Government Securities do not attract deduction of tax at source (TDS) and hence the investor having a non-taxable gross income need not file a return only to obtain a TDS refund.
- Simplicity: To buy and sell Government Securities an individual can place an order with a Primary Dealer. If an individual does not trade in the Equity markets, he / she has to open a demat account and then can commence trading through any Primary Dealer.
- Liquidity: Government Security when actively traded on exchanges will be highly liquid, since a national trading platform is available to the investors.
- Diversification: Government Securities are available with a tenor of a few months up to 30 years. An investor then has a wide time horizon, thus providing greater diversification opportunities.
Essential terms one should be aware of before investing in Government Securities
One must be aware about the following terms associated with Government Securities:
Coupon: The 'Coupon' denotes the rate of interest payable on the security. E.g. a security with a coupon of 7.40% would draw an interest of 7.40% on the face value.
Interest Payment Dates (IP Dates): The dates on which the coupon (interest) payments are made are called as the IP dates.
Last Interest Payment Date (LIP Date): LIP date refers to the date on which the interest was last paid.
Accrued Interest: Accrued interest is the interest charged at the coupon rate from the Last Interest Payment to the date of settlement. Accrued Interest for a security depends upon its coupon rate and the number of days from its LIP date to the settlement date.
30 / 360-Day Count: A 30 / 360-day count says that all months consist of 30 days. i.e. the month of February as well as the month of March is assumed to have thirty days. This convention is used to calculate the accrued interest for Government securities.
Yield: Yield is the effective rate of interest received on a security. It takes into consideration the price of the security and hence differs as the price changes, since the coupon rate is paid on the face value and not the price of purchase.
The concept can be best understood by the following example:
- A security with a coupon of 7.40%:
- If purchased at Rs. 100 the yield will be 7.40%
- If purchased at Rs. 200 the yield becomes 3.70%.
- If purchased at Rs. 50 the yield becomes 14.80%
- Thus it is seen that higher the price lesser will be the yield and vice-a-versa.
- The yield will be equal to the coupon rate if and only if the security is purchased at the face value (Par).
Yield to Maturity (YTM): YTM implies the effective rate of interest received if one holds the security till its maturity. This is a better parameter to see the effective rate of return as YTM also takes into consideration the time factor.
Holding Period Yield (HPY): HPY comes into the picture when an investor does not hold the security till maturity. HPY denotes the effective yield for the period from the date of purchase to the date of sale.
Clean Price: Clean Price denotes the actual price of the security as determined by the market.
Dirty Price: Dirty Price is the price that is obtained when the accrued interest is added to the Clean Price.
Shut Period: The Government security pays interest twice a year. This interest is paid on the IP dates. One working day prior to the IP date, the security is not traded in the market. This period is referred to as the 'Shut Period'.
Face Value: The Face Value of the securities in a transaction is the number of Government Security multiplied by Rs.100 (face Value of each Government Security). Say, a transaction of 5000 Government Security will imply a face value of Rs. 5,00,000 (i.e. 5000 * 100)
Trade Value: The Trade Value is the number of Government Security multiplied by the price of each security. Say, a transaction of 5000 Government Security at a price of Rs.102 will imply a trade value of Rs. 5,10, 000. (I.e. 5000 * 102)
Types
- Central Government Securities: Central Government Securities are a sovereign debt obligation of the Government of India with zero-risk of default and are issued on its behalf by the RBI. They form a part of the Government’s annual borrowing program, and are used to fund the fiscal deficit along with other short and long-term fund requirements. Central Government Securities are normally fixed interest securities where the interest is paid semi-annually.
Different types of Central Government Securities are the fixed interest security, fixed interest security with put/call option, fixed interest security where the subscription amount is paid in instalments, fixed interest security where the maturity amount is received in instalments, floating rate bond, capital-indexed bond and zero-coupon bond.
Most popular of these is the fixed interest security.
Features of the Central Government Securities auction
- Auction can be Yield-based or Price-based as notified in the announcement.
- Auction can be Multiple-price basis (French Auction) or Uniform-price basis (Dutch Auction).
- Bids can be competitive and non-competitive as notified by the RBI in the auction announcement.
- State Government Securities: Issued by the respective State Governments in co-ordination with the RBI. State Government Securities also qualify for SLR. State Government Securities are fixed interest securities where the interest is paid semi-annually. State Government Securities are issued as part of their normal market borrowings or on account of debt swap scheme.
Features of the State Government Securities auction
- Auction can be Yield-based or Price-based as notified in the announcement.
- Auction can be Multiple-price basis (French Auction) or Uniform-price basis (Dutch Auction).
- However till date there has been no Uniform-price auction.
- Bids are only competitive in nature.
Investors: Banks, Primary Dealers, State Governments, Provident Funds, Financial Institutions, Insurance Companies, NBFCs, FIIs (as per prescribed norms), NRIs & OCBs. |
|
