Government securities or G-Sec are also referred to as government bonds. These bonds are debt instruments that are issued by the central and state governments. The aim is to raise funds through investors to be able to meet their capital expenditures. In this type of investment, you loan money as a creditor to the government in return for an agreed upon rate of interest on the amount invested at regular intervals. The money raised by the government is then used as expenditure on development projects like infrastructure, schools, etc.
Before investing in government securities it is important to understand the types of government bonds and how they are different from each other.
In India, the short-term bonds are called treasury bills which are issued by the central government. These have a fixed maturity period of less than one year. Long-term bonds are called government bonds which have a maturity period ranging from 5 years to 50 years. The state government issued bonds are called State Development Loans (SDL).
How To Invest
The Reserve Bank of India recently announced that retail investors can now invest directly in the government's primary and secondary bond market by opening gilt accounts with the national banks and monetary policy regulator. This structural reform will deepen the bond market in India.
What Is A Gilt Account
A gilt account is similar to a regular bank account; the only difference being that instead of money, a gilt account is credited or debited with treasury bills or government securities. The RBI will soon issue guidelines on how one can open a gilt account.
How To Buy Government Securities
Government Securities, Treasury Bills, and SDL are issued in the primary market through an auction conducted by the RBI. Depending on the eligibility of the investor, they may bid in an auction under Non-Competitive Bidding (NCB) or Competitive Bidding. Institutional investors such as banks, primary dealers, financial institutions, insurance companies, and mutual fund investors are eligible to bid competitively. The RBI introduced the Non-Competitive Bidding Scheme in order to encourage retail investors to invest in G-sec, Treasury Bills, and SDL.