V.E.S.

College of Arts, Science & Commerce

Government Securities

By Maneesha R. Punjabi Roll No.: 35 Bachelor of Commerce (Financial Management) (Semester V) Portfolio Management

GOVERNMENT SECURITIES

INTRODUCTION: Government Securities (G-secs) or Gilts are sovereign securities, which are issued by the Reserve Bank of India (RBI) on behalf of the Government of India (GOI). The GOI uses these funds to meet its expenditure commitments. The first Gilt fund in India was set up in December of 1998. Gilt funds can be both short term and long term; depending on their investment horizon, investors can choose between short-term and long-term Gilt funds. Government Securities carry practically no risk of default and, hence, are called Risk-Free Gilt-Edged Instruments. One of the important features of the Government Securities is that they offer wide-ranging tax incentives to the investors. Therefore, these securities are popular in the market. Investors in these securities get tax rebate under the Income Tax Act.

MAJOR PLAYERS IN GOVERNMENT SECURITIES MARKET:

DIFFERENT TYPES OF GOVERNMENT SECURITIES: Following are the different types of Government Securities: a) Treasury Bill: Treasury bills are short-term money market instruments, which are issued by the RBI on behalf of the GOI. The GOI uses these funds to meet its short-term financial requirements of the government. b) Dated Securities: These securities generally carry a fixed coupon (interest) rate and have a fixed maturity period; for example, an 11.40% GOI 2008 G-sec. In this case, 11.40% is the coupon rate, and it is maturing in the year 2008. c) Zero Coupon Bonds: These securities are issued at a discount to the face value and redeemed at par, i.e., they are issued at below face value and redeemed at face value. d) Partly Paid Stock: In these securities, the payment of principal is made in installments over a given period of time. e) Floating Rate Bonds: These types of securities have a variable interest rate, which is calculated as a fixed percentage over a benchmark rate. The interest rate on these securities changes in sync with the benchmark rate. f) Capital Indexed Bonds: These securities carry an interest rate, which is calculated as a fixed percentage over the wholesale price index.

WAYS IN WHICH TRADING IN GOVERNMENT SECURITIES TAKE PLACE: There is an active secondary market in Government Securities. The securities can be bought/sold in the secondary market either: i. Over-the-counter (OTC). ii. Through the Negotiated Dealing System (NDS). iii. Through the Negotiated Dealing System-Order Matching (NDS-OM).

ADVANTAGES AND DISADVANTAGES OF INVESTING IN GILTS: Advantages: Less Credit Risk: Besides providing a return in the form of coupons (interest), Government Securities offer the maximum safety as they carry the Sovereigns commitment for payment of interest and repayment of principal. Held in Demat Form: They can be held in dematerialized form, thus, obviating the need for safekeeping.

Can be Used as Collateral: Government Securities can also be used as collateral to borrow funds in the repo market.

Open to Retail Investors: Only institutional investors can invest in G-sec market, but Gilt funds provide retail investors a low-cost way to invest in G-sec, which otherwise was open only to large players. Diversification: Investment in Gilt funds provide for effective diversification. Disadvantages: Interest Rate Risk: If the interest rate increases, the price of G-sec falls, which is a big risk to the investor.

Mostly Ideal for Short-Term Investment: Makes ideal short-term investment as most of the funds tend to be volatile over longer investment time frame and equity scores over Gilt in the long term.

Not Liquid: Underlying securities are illiquid as they are not frequently traded. So, if the fund manager opts for distress sell to relieve redemption pressure, the fund may suffer loss.

ANALYSIS OF GOVERNMENT SECURITIES:

La s t La s t C pn L a s t Tr d . Tr d . S e c u r i t yIs s u e S T Is s u e D e s c r i p ti o nIs s u e D t . M a t D t . L a s t IP D tN e x t IP D t . p n Fr e q . . C Tr d . R a te D a te Q ty (R s P ri ce i n l a cs ) TR EA S U R Y B IL L S 182D 6 0 7 1 2T B GO I T B I L L 364D 2 1 1 1 2T B GO I T B I L L 6 -Ja n - 1 2 6 - Jul- 1 2 0 4 -N o v - 1 1 2 - N o v - 1 2 0 2 7 - Jun - 1 2 1 3 0 0 0 9 9 .8 2 7 - Jun - 1 2 2 0 0 0 0 9 7 .2

C EN TR A L G O V ER N M EN T S EC U R ITIES C G2 0 1 2 1 1 .0 3 %GS GO I L O A N 1 8 - Jul- 0 0 1 8 - Jul- 1 2 1 1 1 8 - Ja n - 1 2 1 8 - Jul- 1 2 a lf- Y e a r ly 6 - Jun - 1 2 4 5 0 0 1 0 0 H 2 C G2 0 1 2 9 .4 0 %GS GO I L O A N 1 1 - Se p - 0 1 1 1 - Se p -1 2 9 .4 1 1 - M a r - 1 2 1 1 -Se p - 1 H a lf- Y e a r ly 9 - Ja n - 1 2 5 0 0 1 0 1 2 C G2 0 1 2 0 .0 9 %GF GO I F L O A T I N G R A1T0E N o v - 0 31 0 - N o v - 1 2 .7 1 1 0 - M a y -1 21 0 - N o v - 1 H a lf- Y e a r 1 1 - M a y -0 5 8 0 0 0 9 8 .2 8 2 ly