In the 1990s, the Indian government grew serious about the prospect of raising debt capital through government securities - also referred to as bonds or gilts. Before the aforementioned period, while such borrowings used to take form, they remained dominated by large investors like banks and other established companies. However, in what reflected a marked change in the government’s approach, the post-liberalisation era saw these bonds being increasingly issued to individual and non-institutional investors. Fast forward to FY 2023, the total outstanding value of government bonds stands at 161 lakh crores. To put things into perspective, the said value has risen by 77% since FY 2018. The dominance and popular acceptance of government bonds is further exhibited by the fact that it occupies 78% of the market share pertaining to the bond market.
As an investor who intends to explore the bond market in India and government bonds, in particular, where and how should you start? And what should you know? Following are some of the salient features affiliated with government securities in India in current times:
Security
Despite changes over the last 3 decades, a cursory glance over prevailing data would reveal that an overwhelming majority of investors in India still trust the government far more than even the most seemingly infallible private corporations. Indeed, since little to no instances of defaults on part of the governments have come to the fore, the creditworthiness of bonds issued by the government rank higher than other categories of bonds by a good distance.
Investment Horizon
Government bonds in India are subject to a great abundance of options, as far as holding periods and investment horizons are concerned. From short term bonds spanning a year to long term bonds spanning between 5 and 40 years, the range of options pertaining to government securities efficiently caters to the varying needs, demands and goals of its investor base.
Liquidity
Generally, government bonds are understood to have a fine quotient of secondary market liquidity. However, liquidity situations generally take form as the product nears the maturity period and in situations when the market activity is affected by macroeconomic changes or vitally relevant policy decisions. Having said this, however, it would not be incorrect to state that, at least in comparison to other types of bond offerings, government bonds fare better than other types of bond offerings in terms of liquidity, primarily owing to an established secondary market and the inclusion of government bonds in reputed indices.
Gains & Losses
While government bonds offer a good measure of security, the total returns derived from a bond investment on an average remain far lower than those derived from high-risk investments like direct equities and mutual funds. Indeed, in a high-inflation environment, the chances of a decline in the value of real investments in respect of government bonds remains high. However, since these gains fare better than more traditional options like fixed deposits, investments in government bonds offer a middle ground for investors who are looking for a combination of limited risks and reasonably higher returns.
Gains pertaining to investments in government bonds also manifest themselves in the form of tax benefits, which lower the total financial obligations investors must necessarily discharge. Additionally, since these investments offer a steady stream of income in the form of interest income, while also ensuring security, they remain attractive options for investors who are nearing retirement from work.
However, while risks associated with government bonds are less in comparison to those linked to the equity market, they still admittedly prevail. In addition to inflation risks, government bonds are also subject to currency risks – wherein fluctuations in exchange rates of a select few foreign currencies stand to impact the value of one’s investments in those government bonds which are denominated in the said foreign currencies.
Ease of Access
Unlike corporate bonds in India, which are privately placed and dominated by institutional investors, government bonds allow individual investors to enter the bond market with an investment as low as Rs. 1,000, thus catering to small-income and retail investors in the process. Indeed, the increasing frequency pertaining to Bond IPOs and stock exchange listings with respect to government bonds have greatly ameliorated the quandary of access that used to once characterise the bond market in India.
Novel Sub-categories
Over the last few years, municipal bonds and green bonds have made their foray into the sector, thereby widening the range of options offered by the bond market. While municipal bonds are issued by government bodies with the purpose of funding local public projects, green bond issuances by the government have also seen an uptick. Relevantly, in 2022, the government announced that it would issue sovereign green bonds worth Rs. 16000 crores with a view to fund seemingly climate-friendly projects. Veritably, the said sub-categorisation within the category of government bonds provides investors with additional opportunities to further diversify their investment portfolios.
Conclusion
All in all, as already discussed, investment in government bonds harbours the potential to reconcile the dilemma of investors who wish to avoid riskier choices while continuing to expect reasonable total returns from their investments.
Furthermore, considering its trajectory of growth in the last 5 years, the government bond market has shown no signs of slowing down. For this reason, investing in government bonds serves as an attractive option for investors who wish to form a variegated investment portfolio.
Disclaimer: The contents of this article should not be construed as tax or financial advice. Readers should seek advice from their tax or financial advisor before making any investment decision.