For risk-averse investors, bonds are an attractive investment tool. Among various types of bonds offered, government bonds are considered to be the least risky as they are backed by sovereign guarantee.
In India, while the Central Government issues treasury bills and government bonds, state governments only issue bonds and dated securities.
Government bonds are investment instruments floated by the government to raise money to finance big-ticket expenditures like infrastructure projects. In India, the government issues these bonds through the Reserve Bank of India (RBI).
Investors can choose to invest in the variety of such tools. Following are the types of government bonds available:
Sovereign Gold Bonds, or SGBs, are linked with the price of gold and eliminate the need to hold physical gold for investment in this hard asset. They also offer an interest rate of 2.50% p.a. This allows investors to benefit from the value appreciation of gold as well as the accrued interest.
Also known as coupon bonds, these government securities have a fixed interest rate that is determined at the time of issuance. The bonds can have a maturity period ranging from 5 to 40 years, during which the government bonds’ rates remain constant.
PSU bonds, as its name suggests, are issued by the Public Sector Undertakings (PSU), companies with majority shares in the hands of the government. These are medium-to-long-term debt securities that are most suitable for high-tax-paying investors.
Zero-coupon bonds are those government bonds that do not offer any interest. The income in these bonds can be generated through the price difference from the time of purchase to the redemption.
Inflation Indexed Bonds are inflation-linked government securities. The value of these bonds corresponds to the inflation rate. For instance, if inflation rates are high, the value of these debt securities rises, and vice versa.
By investing in the government bonds, you can enjoy the following benefits:
These bonds come with a sovereign guarantee helping you provide a regular fixed income
Since these securities are government-backed, investors are generally at lower risk
Certain bonds, like municipal bonds issued by municipal corporations, are generally exempt from taxation
To buy government bonds from brokerage firms, you will first need to open a Demat or trading account. Alternatively, you can avail of an Asset Management Company’s (AMC) service to invest in these bonds.
RBI also lets you buy government bonds through its RDG portal. To buy these securities from the RBI portal, all you have to do is open an RDG account. The RBI charges no opening or account maintenance fee for an RDG account.
In conclusion, government bonds issued by the Central Government are considered to be a safe investment option. However, these offer much lesser returns when compared to other market-linked investment avenues like mutual funds, ELSS, etc.
However, if your primary financial goal is wealth creation through safe avenues, it is advisable to park your funds in such debt securities.
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To be eligible to buy government bonds, you need to be an Indian resident.
The minimum amount that you can invest in government savings bonds is ₹1,000. However, there is no maximum limit on government bond investment.
SGBs come with a eight-year tenor, after which you can redeem it into cash. However, you can also avail of the facility to redeem it prematurely after five years of investment.