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College of Arts, Science & Commerce

Government Securities

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

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

The securities can be bought/sold in the secondary market either: i. . 11. which is calculated as a fixed percentage over the wholesale price index.DIFFERENT TYPES OF GOVERNMENT SECURITIES: Following are the different types of Government Securities: a) Treasury Bill: Treasury bills are short-term money market instruments. the payment of principal is made in installments over a given period of time. an 11. The GOI uses these funds to meet its short-term financial requirements of the government. Through the Negotiated Dealing System (NDS). which is calculated as a fixed percentage over a benchmark rate. c) Zero Coupon Bonds: These securities are issued at a discount to the face value and redeemed at par. Over-the-counter (OTC). The interest rate on these securities changes in sync with the benchmark rate.40% GOI 2008 G-sec.40% is the coupon rate. ii. they are issued at below face value and redeemed at face value. for example. d) Partly Paid Stock: In these securities. WAYS IN WHICH TRADING IN GOVERNMENT SECURITIES TAKE PLACE: There is an active secondary market in Government Securities. f) Capital Indexed Bonds: These securities carry an interest rate. In this case.e. Through the Negotiated Dealing System-Order Matching (NDS-OM). iii.. and it is maturing in the year 2008. b) Dated Securities: These securities generally carry a fixed coupon (interest) rate and have a fixed maturity period. i. e) Floating Rate Bonds: These types of securities have a variable interest rate. which are issued by the RBI on behalf of the GOI.

the price of G-sec falls. . which is a big risk to the investor. but Gilt funds provide retail investors a low-cost way to invest in G-sec. if the fund manager opts for distress sell to relieve redemption pressure. • Held in Demat Form: They can be held in dematerialized form. the fund may suffer loss. which otherwise was open only to large players. • Not Liquid: Underlying securities are illiquid as they are not frequently traded. Government Securities offer the maximum safety as they carry the Sovereign’s commitment for payment of interest and repayment of principal. thus. • Diversification: Investment in Gilt funds provide for effective diversification. • 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. So. Disadvantages: • Interest Rate Risk: If the interest rate increases. • Can be Used as Collateral: Government Securities can also be used as collateral to borrow funds in the repo market. obviating the need for safekeeping. • Open to Retail Investors: Only institutional investors can invest in G-sec market.ADVANTAGES AND DISADVANTAGES OF INVESTING IN GILTS: Advantages: • Less Credit Risk: Besides providing a return in the form of coupons (interest).

4 0 %GS GO I L O A N 1 1 .Se p .1 2 4 5 0 0 1 0 0 H 2 C G2 0 1 2 9 . M a t D t .Jun .N o v .1 2 6 .M a y -1 21 0 .1 H a lf.1 2 2 0 0 0 0 9 7 .1 2 1 1 1 8 . C Tr d .M a y -0 5 8 0 0 0 9 8 .1 H a lf.Ja n . 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 0 2 7 .Jul.1 2 0 4 -N o v .Se p -1 2 9 .ANALYSIS OF GOVERNMENT SECURITIES: La s t La s t C pn L a s t Tr d . .Jun .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 .Jul.N o v .4 1 1 . 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 r .0 0 1 8 .Jul.1 2 1 3 0 0 0 9 9 .Y e a r ly 6 .1 2 5 0 0 1 0 1 2 C G2 0 1 2 0 .1 2 1 1 -Se p .Y e a r 1 1 .0 3 %GS GO I L O A N 1 8 .8 2 7 .0 1 1 1 .0 31 0 .0 9 %GF GO I F L O A T I N G R A1T0E N o v .1 2 a lf.7 1 1 0 .2 8 2 ly .Ja n .Y e a r ly 9 .Jun .Jul.N o v . p n Fr e q .1 1 2 . L a s t IP D tN e x t IP D t . Tr d .1 2 1 8 .1 2 .