Since ages, government bonds have been a viable investment for banks, financial institutions, and other corporations. In recent years, retail investors have also shown an increased interest in government bonds. The alluring factors include government-backed bonds providing encouraging returns over the long term and the ability to diversify the investment portfolio.
Types of Government Bonds
Sovereign Gold Bonds
The Central Government issues Sovereign Gold Bonds (SGBs). SGBs assure investors to receive the periodical interest and the market value of gold at the maturity date, unlike gold in physical form. Long-term investors who do not want to take the burden of holding physical gold prefer SGBs. The bonds are stored in the demat form that eliminates the risk of loss of scrip. The interest from SGBs is tax-exempt.
HUFs, trusts, universities, and charitable institutions are permitted to invest in SGBs. RBI has fixed different ceilings for SGB investments, depending on the type of investor. Individuals and HUFs (Hindu Undivided Families) are allowed to hold up to 4 kg of SGBs per fiscal. Trusts can hold up to 20 kg in a financial year.
Investors pay the bond issue price in cash or through online mode. The bond price is linked to the gold price. The bond denomination is also in terms of a gram of gold. The bond value is calculated by the simple averaging of 999 purity gold’s closing prices. For averaging, the closing price of the past three business days from bond issuance is considered.
SGBs are issued with a fixed maturity period of 8 years. Investors are allowed to redeem these bonds after the 5th year of holding. The interest is disbursed periodically at the rate of 2.50%.
As the name defines itself, these are Government bonds with a fixed coupon rate. The coupon remains fixed throughout the tenure. Once it is set and you have invested in these bonds, you will receive the interest at the same rate, irrespective of fluctuating market rates.
The name of this type of bond is based on the coupon rate it comprises. For example, “5.6% GOI 2026”, issued in 2021. It explains the following details:
Coupon on face value 5.6% Issuer Government of India Tenor 5 years The maturity year 2026
Floating Rate Government Bonds
The coupon on Floating Rate Government Bonds is subject to periodic change. Government reviews the coupon rate at pre-announced intervals during the maturity period, for example, after a quarter or semi-quarterly, or annually. A semi-quarterly review means the coupon rate will be changed every six months throughout the bond tenor.
Floating Rate Government Bonds Coupon can be divided into a base rate and a fixed spread. In this type of floating-rate bond, RBI decides the spread through auction. Once decided, it remains the same till the maturity date.
State Development Loans (SDLs)
As the name suggests, these are the bonds issued by the State Government. State governments issue these bonds to meet the budgetary requirements. It may sometimes happen that state expenditure is higher than revenue. In such a situation, State Governments need to issue SDLs with the 10 years maturity date to fund this fiscal deficit, up to a set limit. The interest rate on these bonds is decided through an auction arranged by RBI and is higher than other types of G-Secs. SDLs are the most liquid among all G-Secs.
Bonds with Call/Put options
A callable bond is one where the issuer has the right to redeem/buy back the bond at the rate decided at the time of issue before the maturity period. A puttable bond is one wherein the investor has the option of selling the bond back to the issuer at a price determined at the time of issuance of the bond, before maturity. Bonds can be issued with call option only, put option only, or can have both options. An example of a call bond is the SBIN N5 Bond issued by the State Bank of India in 2020.
There can be other types of government bonds also, including Capital Indexed Bonds, Inflation-Indexed Bonds, War Bonds and Climate Bonds, Zero Interest Bonds, and other Special Securities.
Bonds present an array of investment options. One hindrance is the lack of knowledge and the limited reach to all income groups. Investors can rely on RURASH Financials to make an informed investment decision. We help our clients to include high-rated bonds like Asirvad Microfinance Ltd with high returns at 10.08%, South Indian Bank Ltd offering higher returns at 13.29%, etc., in their portfolios. We also cater to the Ultra HNI and NRI segments. In conclusion, bonds bring safety to your portfolio, and RURASH Financials makes it easier for you.