What are government bonds?
Government bonds are debt securities issued by the central government through the Reserve Bank of India, the central bank of India.
Government bonds can be sold to investors in the domestic market or they can be sold to overseas investors too. Investing in it is no different than any other asset class. So for instance for investing in gold you would may be look up gold rate in Vijayawada or any other place and then invest similarly with government bonds you would check the price and potential returns and then invest. Visit this page for more info.
In India you can invest in many different types of government bonds. Some of them are as follows:
- Zero-coupon bonds
A zero-coupon bond (also discount bond or deep discount bond) is a bond where the face value is repaid at the time of maturity. However, with zero coupon bonds you don’t earn the periodic interest payments this is where it gets the name zero coupon bonds. Zero-coupon bonds are normally issued at a discount, rendering profit at maturity when the bond is redeemed for its full face value.
- Treasury Bills
These are short-term debt instruments that are issued by the central government through RBI on behalf of it. Treasury bills maturing within 91 days, 182 days or 364 days from their issue date.
- Inflation-Indexed Bonds
These bonds have a maturity period of 10 years with an interest rate that is linked to inflation rates, generally CPI inflation index rate. The interest rate is fixed and paid at periodic intervals while the principal is repaid at the maturity date
Why you should invest in government bonds?
- Low risk
Government bonds are low-risk investments and offer better returns than fixed deposits or savings accounts.
- Interest rates
The interest rate on these bonds is higher compared to those offered by banks for fixed deposits of similar tenure. The rates are also higher than those offered by National Savings Certificates (NSC) and Public Provident Fund (PPF).
- Opportunity for risk aversion
Government bonds are not immune to market risks hence you can see a drop in the value of your potential returns from these bonds. However, if you choose to hold the bonds till maturity you can eliminate this risk. Hence, just like gold where you would for instance track today’s gold rate Nellore and wait out the rough period with government bonds you can maintain patience until the risks nullify.
- Fixed interest rate
With government bonds, you will get a return at a fixed interest. Hence if you hold on to the bond till maturity you can easily earn the maximum yield.
- Good for diversification
By including government bonds in your investment portfolio you will inevitably add diversion to it. This will help you in reducing the risks as the government bonds are one of the most stable and trustworthy in terms of performance out of all the asset class
Disadvantages of investing in government bonds:
- Only good for long term
If one is planning for short term goals or looking for some quick gains from their investments, then investing in government bonds might not be ideal for them as these are long term and generally do not offer high returns compared to other asset classes
- Secondary market is underdeveloped
The secondary market for government bonds is still not fully developed. This reduces the liquidity of government bonds. However, if you are in for the long haul this should not be a problem