3 Simple Ways to invest in Government Bonds

Government bonds, also known as government securities or G-Secs, are debt securities backed by the government. By investing in government bonds for a fixed tenure, investors earn floating or fixed interest. The interest is paid annually or semi-annually. As these bonds are offered by the government, there is virtually zero default risk.If you are a long-term investor looking for risk-free returns, then government bonds can be an ideal addition to your portfolio. But how to invest in government bonds ? Here’s everything you should know-

The government is required to finance several projects for the public's welfare. If the government requires funding for these projects, then it issues bonds that investors can purchase. The RBI supervises these government bonds. The bonds generate interest income throughout the holding period, and the face value is repaid to the investors on maturity.The current government bond yield for 10 years is 7.1%, making it an excellent long-term investment. But it is worth noting that most government bonds come with floating rates where the interest rate is adjusted at regular intervals.

So, how to invest in government bonds ? Choose one of these three options-

The easiest way for retail investors to invest in government bonds is through GILT mutual funds. These are debt funds that invest in government securities. Like other types of mutual funds, investors can invest in GILT funds through a lump sum investment or SIP ( Systematic Investment Plan ).But as these are mutual funds, there is an expense ratio involved. The fund houses charge a certain fee to manage your investment in these schemes. For GILT funds, the upper limit for expense ratio is 2.25%. Compare the expense ratio of top GILT schemes before investing to generate higher returns.

The RBI has recently launched its Retail Direct Scheme , allowing retail investors to invest in government securities online. Any retail investor can register for an RDG (Retail Direct GILT) account online to invest in these securities. With the RDG account, investors can invest in-

• Dated Government Securities (Dated G-Secs)
• State Development Loans (SDLs)
• Government of India Treasury Bills (T-Bills)
• Sovereign Gold Bond (SGB)

For SDLs, T-Bills, and Dated G-Secs, the minimum amount of investment for retail investors is Rs. 10,000. For SGB, the minimum investment is 1 gram of gold. One of the biggest advantages of investing through the Retail Direct Scheme is the elimination of intermediaries between investors and the government. Due to this, there are no additional charges for investing through this scheme.

If you have a trading and Demat account, then you can also invest in government bonds by registering on exchanges. With this, you can bid for government securities during the limited window and hold the securities in the Demat account.Alternatively, you can also invest in government bonds through stockbrokers. There is a non-competitive bidding process where the bond yield depends on the number of bids received from institutional investors. Bond is allocated to all the investors depending on the market yield.Also, whenever the RBI opens the temporary investment window for government bonds, investors can invest through banks and Post Offices. Most banks now offer this facility online.

As the bonds are issued by the government, the default risk is close to none. The interest rate is also highly competitive and even higher than what you receive from bank FDs in most cases. Also, unlike FDs, you don’t have to pay TDS on government bonds. Due to these reasons, government bonds are an ideal long-term investment for risk-averse investors.Even if you have a higher risk appetite, you can still consider adding government bonds to your portfolio to diversify your investments.

With returns guaranteed by the government, government bonds are one of the safest investment options for retail investors. Now that you know how to invest in government bonds , choose any of the listed methods to invest and add more stability to your investment portfolio.But if you’ve recently started your investment journey and don’t know much about government securities, then it’d be wise to consider professional assistance before investing.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.