Many people invest in debt mutual funds, which have government securities as part of their portfolio.
1. What is a Government Security (G-Sec)?
A government security (G-Sec) is a tradeable instrument issued by the central government or state governments. It acknowledges the governments debt obligations.
Such securities are short term — called treasury bills — with original maturities of less than one year, or long term — called government bonds or dated securities — with original maturity of one year or more. In India, the central government issues both: treasury bills and bonds or dated securities, while state governments issue only bonds or dated securities, which are called the state development loans. Since they are issued by the government, they carry no risk of default, and hence, are called risk-free gilt-edged instruments.
2. Who are the players in the G-Secs market?
Major players in the G-Secs market include commercial banks and primary dealers (PDs) besides institutional investors like insurance companies. PDs play an important role as market makers in G-Secs market. A market maker provides a firm two-way quotes in the market i.e. both buy and sell executable quotes for the concerned securities. Other participants include co-operative banks, regional rural banks, mutual funds, provident and pension funds. FPIs are allowed to participate in the G-Secs market within the quantitative limits prescribed from time to time. Corporates also buy or sell G-Secs to manage their overall portfolio.
3. Why are G-secs volatile?
G- Sec prices fluctuate sharply in the secondary markets. The price is determined by demand and supply of the securities. The price is influenced by the level and changes in interest rates in the economy and other macro-economic factors, such as, liquidity and inflation. Developments in other markets like money, foreign exchange, credit and capital markets also affect the price of the G-Secs. Further, developments in international bond markets, specifically the US Treasuries affect prices of G-Secs in India. Policy actions by RBI like change in repo rates, cash-reserve ratio and open-market operations also affect their prices.
4. How can investors buy G-sec?
Investors can buy G-secs directly through a few broking platforms or indirectly using the mutual fund route. Mutual funds are also more tax efficient as they offer indexation benefits if held for more than three years. On the other hand, interest received from a government security is taxable in the hands of the investor.
TEXT: Prashant Mahesh