GOVERNMENT BONDS
The Bonds are the debt instrument provided by the corporate or
government to debt holders, creditor and the issuer. The bonds are helpful for
providing financial support in spending. The Government Bonds Has Fixed or
Floating Interest rate provided half yearly or yearly basis.
The G-SEC (Government Security) is an instrument provided by the
central or state government. The Tenor of G Sec ranges from 5 Years to 40
Years.
T-BILLS (Treasury Bills) are the short-term debt instruments
provided by the government of India. It is issued in three tenors 1- 91
Days, 2- 182 Days, 3 – 364 Days.
CMBs (Cash Management Bills) are also short-term instruments used
for cash flows by the government of India. It has limit less than 91 Days.
There are various Instruments in Government Bonds such as
1-
Fixed Rate Bonds.
2-
Floating Rate Bonds (FRB).
3-
Capital Indexed Bonds.
4-
Inflation indexed Bonds.
5-
Bonds with Calls/Puts Option.
6-
Special Securities.
7-
Strips (separate trading of registered
interest and principal of securities).
8-
Saving Taxable Bonds.
9-
Sovereign Gold Bond (SGB).
Currently Government Bonds are offering higher rate of return than fixed deposit rates (5-7%). The interest earned through the bonds are taxable according to various slabs. The Bonds are exempt from wealth tax under the Wealth Tax act 1957.
How to invest in Bonds
Retail Investor can directly go through the official app for
purchase of bonds through NSE goBid (Government Bond Investment Destination)
https://www.nseindiaipo.com/eipodc/rest/login
Also, it can be purchase with your Bank trading account – ICICI
Bank Link
-
https://www.icicidirect.com/idirectcontent/ProductService/ProductService.aspx?FDBonds/list-of-bonds
Karvy Value - https://www.karvyvalue.com/website/top-tax-free-bonds.aspx
Investment in G- SEC
The Government bonds provide a fixed return (interest rate) over a
duration of time. G SEC provide maximum safety of capital protection as they
carry sovereign’s commitment for payment of interest and repayment of
principal.
The Investment in this type of bonds are also risk free as it is regulated and manged by (RBI) Reserve Bank of India.
They are available in wide range from 91 days to 40 years.
It can be sold easily to meet cash liquidly support in the
secondary market.
G-SEC provide attractive yields better than Saving account or
Fixed Deposit. It also offers Tax Benefits.
The Investment in Government bonds are perfect and risk free for
long term investment products.
Explanation on Why Government Bonds are Important.
As per the current situation in the market, saving plays an
important role in everybody life as the inflation rises day be day and so the
purchasing power decrease day by day. So, in order to grow your money beating
the inflation, Investment is necessary. The Bonds providing a 7.75% rate of
interest helps to create a stable wealth creation. The bonds provide a wealth protection over a
period of time from a range of 5 to 40 years.
The Bonds Provided a guaranteed income and a higher yield return
as compared to PPF, FD and Mutual funds.
There are also other investment options like Equity Mutual Funds which
offer a higher return than the bonds i.e. 10-14 %p.a. But in the recent scenario
like pandemic covid-19 the market was crashed as the result many Equity Mutual
Funds lost nearly 20 to 30 Percent. Most of mutual funds were in negative
return. So, at a times the fixed deposit or Bonds are helpful for protecting
the Wealth. This is where the Government bonds are needed for investment.
Taxes on Government Bonds –
There is various tax applicable on
Government Bonds such as Short-term capital tax and Long-term capital
tax (10%,20%). The interest income generated from tax free bonds are tax free,
but the capital gains generated from Government bonds are still taxable
according to tax slab.
The G-Secs can be held by various
means such as Physical Form (stock certificates) and Demat Form (electronic
form).
Risks of Holding Government Bonds (G-Secs)
Liquidity Risk – This
risk is raised due to the inability of an investor to sell their holdings when
there are no buyers for the security. Because there may be a difference in
which the security can be bought and sold in the market, that’s why there may
be chance of no buyers available in various conditions.
Market Risk - Market
risk is due to the sudden movement of prices in the securities which happen to
change in the interest rates. There will be a loss of various securities in
such conditions in the market.
Reinvestment Risk- Incomes
on a G-Sec incorporates a coupon each half year and reimbursement of head at
development. These incomes should be reinvested at whatever point they are
paid. Subsequently there is a hazard that the financial specialist will most
likely be unable to reinvest these returns at yield predominant at the hour of
making speculation because of decline in loan costs winning at the hour of
receipt of incomes by speculators.
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