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How to Buy Government Bonds in India?

Compared to bank fixed deposit schemes, government bonds offer better rates and a longer term. Here is how to purchase them as well as other substitutes for these financial vehicles.

You can purchase government bonds through the Reserve Bank of India’s (RBI) Retail Direct portal. Unlike banks, long-term government bonds offer a relatively higher interest rate and an extended tenure that can last up to 40 years. For example, a government bond, issued in February and maturing in 2029, offered 7.10% interest rate, far exceeding bank s typical fixed deposit rates for a six-year term.

Buy Government Bonds

What Are Government Bonds?

Since they are often issued for maturity durations between 5 and 40 years, they are typically long-term debt investment vehicles in India. At the conclusion of this term and on the bond’s maturity date, the relevant government will pay the bond’s face amount.

One of the differences between a corporate bond and a government bond is that the former is always issued to carry out a public project that will ultimately benefit the Indian public, such as a highway, railway station, foot overbridge, public library, river, etc., while the latter is always issued to finance a company’s operations, new projects, etc. 

Since they can be exchanged on the secondary market, long-term government securities have maturities of seven years or longer and no lock-in period. Due to the possibility of falling bond prices, trading in the secondary market may be risky. Based on the investor’s age, premature withdrawal is also permitted. For instance, subject to the bond features, persons over 60 are permitted to withdraw after four or five years. Additionally, interest on bond trading is taxed.

In India, one can purchase government bonds from banks, post offices, brokerage houses, gilt mutual funds, and the retail direct portal of the RBI. If you choose to purchase bonds through a brokerage company, you must open a demat or trading account with them. You could have to pay for the AMC’s fund management if you purchase the government bonds through a gilt mutual fund.

Individuals can invest directly in G-Secs through RBI Retail Direct, however in order to complete transactions, they must first register or form an account on the Retail Direct Gilt (RDG) portal. Additionally, unlike brokerage accounts, there are no setup fees or ongoing fees for RDG accounts.

Several types of Indian government bonds include:

  • Sovereign gold bonds (SGBs): These bonds, which are issued by the central government, let investors purchase gold without having to worry about storing it safely or worrying about theft.
  • IIBs: Investors can protect their portfolios against inflation by indexing their investments based on the Consumer Price Index (CPI) or Wholesale Price Index (WPI). These bonds’ returns are unrelated to the market and act as a hedge against inflation.
  • Treasury bills: Treasury bills are short-term government securities with a maturity of less than a year. Three different lengths of time for treasury bills are 91, 182, and 364 days.
  • Cash Management Bills are government-issued securities with a maturity of less than 91 days. 
  • 7.75% GOI Savings Bonds: These bonds pay out taxable interest at a fixed 7.75% rate. 
  •  State Development Loans (SDL):The State Government has issued these bonds in order to meet its funding requirements. Compared to bonds issued by the Central Government, these bonds often carry larger coupons.

How Can I Invest in Indian Government Bonds?

Over time, the bond market has expanded quickly. Government bonds are one of the least hazardous types of bonds available on the market. Even governments need money to address social and economic concerns, just like businesses and people do. These bonds, also referred to as G-Secs, raise additional cash from the general public in exchange for interest payments and complete capital returns on the maturity date. Government bonds can be purchased both offline and online by investors.

All public monies can be invested in public projects, used to build new roads and schools, and utilised for renovations. However, how do you buy government securities? Before getting started, let’s understand how to invests in the government bonds.

How Do I Invest in Bonds from the Government?

Governments issue public bonds if their financial resources are depleted. Direct market purchases of government bonds are available to investors. As of May 2022, the yield on a 10-year government bond is at 7.244%. Even if these figures change over time, they nonetheless provide investors with reliable returns. But how do you purchase government bonds? There are two different ways to purchase government bonds:

Put money into GILT mutual funds.

establishing a bank trading Demat account.

How can I purchase or buy  government bonds?

In India, one can purchase government bonds in a few different ways:

  • Postal services and banks:

You will need to provide a form, your Demat account number, and pertinent papers like your Aadhaar card, PAN card, voter ID card, or another form of address/identity verification in order to purchase a G-Sec from a bank or post office. Your request will be processed by the bank or post office, which will subsequently issue a bond certificate in your name. 

  • Brokerage House:

Bonds can also be bought through a brokerage house. Both a trading account and a Demat account are required with that company. They will charge you a brokerage fee and outline the paperwork needed for you to begin purchasing or selling bonds.

  • Exchange-Traded Funds (ETFs) and Gilt Mutual Funds (MF):

The responsibility of selecting the “best” bond is no longer your responsibility when you purchase a G-Sec through an ETF or GILT MF. It is simpler to invest in G-Secs and receive consistent returns because the MF or ETF provider will choose the bonds for you.

Prior to investing, do take the instrument’s expense ratio into account. The costs fund companies charge investors for managing their funds affect this ratio. Your results will suffer if a particular G-Sec’s ratio or Government Securities Ratio is higher than you are comfortable with. This is why it’s crucial to choose a G-Sec that provides a competitive and reasonable expense ratio.

  • RBI Retail Direct:

The RBI’s Retail Direct plan, introduced in November 2021, enables private investors to make direct G-Sec investments. Register with the RBI for a Retail Direct Gilt (RDG) account to use this option. You will be able to take part in several different G-Secs’ primary issuances using this gilt securities account. The RDG account is free to open and maintain, unlike a brokerage trading account.

  • BSE Direct or NSE goBID:

By participating in non-competitive bidding (NCB) through the NSE’s goBID or the BSE’s BSE Direct web portal or mobile application, eligible investors may purchase G-Securs, State Development Loans (SDLs), and Treasury Bills (T-Bills). Banks and NBFCs, primary dealers, mutual funds, insurance providers, and individual investors are just a few examples of these investors. The RBI’s Gsec auctions are facilitated through NSE or BSE. 

Which Indian Government Securities Are the Best to Buy?

Government can raise money for initiatives in a variety of ways from the general population. The following is how investors can purchase government bonds:

  • Treasury Bills:

These are short-term securities that the government has issued. These government securities, which are also sometimes referred to as T-Bills, have maturities of 91 days, 182 days, and 365 days, respectively. To receive interest payments and capital protection, people purchase government bonds. However, in this instance, paying for treasury notes results in investors receiving no interest. These securities, sometimes known as zero-coupon securities, are issued at a discount and redeemed at par when they mature. The investor’s gain is the difference between the par receipt and the discounted purchase.

  • State Government Loans:

Investors interested in purchasing government bonds may consider this alternative. To cover the budget shortfall, the state government issues dated securities to the general population. By issuing these bonds, the state government would have more money to develop the necessary public needs. On the secondary market, investors can purchase SGLs or government bonds. The Reserve Bank of India coordinates an auction format for the first issue to be made on the primary market.

  • TIPS, or Treasury Inflation Protected Securities:

Purchasing these government securities will protect you from falling losses and enhance your purchasing power if inflation is really hurting the economy. The Treasury Inflation-Protected Securities (TIPS) have terms of five, ten, or thirty years. This kind of bond helps investors maintain equilibrium despite price fluctuations.

Every six months, TIPS investors receive interest, which is calculated based on the security’s current par value. In other words, changes in the CPI inflation value cause changes in the TIPS value. Sadly, when inflation is low, TIPS value plummets. However, investors receive either the initial par value or more upon maturity, but not less. TIPS impose taxes as a result of investors receiving interest payments. You must keep in mind that the value of TIPS bonds increases in line with changes in inflation rates.

How Much Do Brokerage Fees on Government Bonds Cost?

Bonds issued to investors are subject to broker fees levied by the government. The brokerage fee for government bonds will be 6 paise for every 100 rupees, according to the RBI. Since the investment must be at least Rs 10,000, the brokerage fees will be Rs 6. A further 18% GST will be added to the total brokerage charged for the bond.

  The Bottomline/Conclusion:

Federal government bonds are among the safest investments available and frequently offer the risk-free rate of return. However, they also have significantly lower yields as a result of their decreased risk. Treasuries, which include short-term T-Bills, medium-term T-Notes, and long-term T-bonds, are the name given to federal bonds in the United States. Bonds are also frequently issued by foreign governments. Municipal bonds (munis) may also be issued by state and local governments. Some investors find these appealing since they can provide specific tax breaks.

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