Buying government bonds in India sounds confusing and exciting. Not all banks or industrialists can invest in government bonds and securities, but like a short-term investor, each person can make this investment. Before getting to details, you need to ask yourself if you are seeking long term or short term investments. When learning how to buy government bonds, it is essential to have one Demat account when investing in shares. These accounts are areas where all mutual funds and trading stocks happen.
Hearing the term stock market may scare you, but there is no need of getting worries because government bonds and stocks are not always available at stock markets. They come with all leading post offices and banks.
For investment, you will visit a branch in the neighborhood with documents to fill the forms. A minimum period will be necessary if you want to process the request, after which you will get a bond certificate in your name. It seems simple but it is good to go to the details to see who gets registered and the way the process functions.
Initially, small-time investors did not deal in government bonds and securities, but it is now possible because of RBI/ it has come up with the negotiated dealing system and order matching platform. All primary dealers and banks of securities are members of this scheme, and individual investors can also sell and buy bonds via them.
Note that government securities come in terms of SGL accounts. After the PD or government executes the order, it would clear it and convert SGL to accounts demat forms and transfer money to demat accounts. The proof purchasing this scheme is that because other dealers do not exist under NDS – OM, it is not possible for them to trade for you.
The other advantage is for retired people and long-term investors. Seniors that invest for twenty to thirty years get an interest of eight percent on spent money, which is higher than many debt instruments. You can also get benefits when you invest in government bonds. Because the market is volatile, individuals seeking a safe transaction form can begin investing in these funds. Before you invest, read and research all details of how to buy government bonds and securities.
How to buy Government Bonds In India:
What is the meaning of government bonds in India?
Government securities are tradable instruments provided by state or central governments. They acknowledge the debt obligations of the government. These securities are short term, known as treasury bills, with initial maturities of not over one year, or the long term ones known as government securities or government bonds that mature after one or more years. The central government of India issues both dated securities or bonds and treasury bills, while state governments provide dated securities or bonds only, known as development loans. Because they come from the government, they do not have default risks, which give them the risk-free name instruments.
Who plays in the Government securities market?
Leading players in this market include primary dealers and commercial banks besides organizational investors like insurance firms. Primary dealers play a crucial role as makers of demands for the bonds. The market maker offers two-way quotes inside the market, that is, both sell and buy executable quotes for securities in question. Other participants are regional rural banks, co-operative banks, pension funds, provident funds, and mutual funds.
Why are government bonds volatile?
When learning how to buy government bonds, you need to note that prices fluctuate in secondary markets. The supply and demand for bonds determine the prices in the market. The price changes and level of interest rates depend on the economy and other factors like inflation and liquidity. Changes in markets like foreign exchange, money, capital, and credit markets also affect the prices of bonds. Other developments in external markets of bonds, especially the treasuries of the United States affect government bonds in India. RBI policy actions like changing the cash reserve ratio, repo rates, operations of the open market also affect the pricing.
How can you buy government bonds?
You can buy government bonds directly through broking firms or the use of mutual fund routes indirectly. Mutual funds are tax efficient because they offer benefits of indexation when held for over three years. Conversely, received interest from government bonds is taxable for investors.
Government bonds market is full of institutional investors like insurance firms, banks, provident funds, and mutual funds. Deals run to many rupees, leaving a small scope for a small investor to participate. It could change soon with the introduction of the system allowing for holders of demat accounts to sell and buy government securities on the managed dealing platform.
All primary dealers and banks of government securities are members NDS-OM and investors on retail can channel their sell or buy orders through them. Securities are held in general ledger accounts. After the execution of your order through PDs or banks, Clearing Corporation of India converts SGL to demat form to transfer it to personal demat accounts.
This move is positive because small-scale investors do not access long-term income instruments. Fixed deposits of banks have a tenure of ten years. However, you can purchase government bonds for up to thirty years. Allowing an investor to invest directly is a good move for it can lock in up to thirty years of binds.
This move suits pensioners seeking a safe option for investment that can provide long-term returns. As at now, the yield of bonds of thirty years is more than eight percent, which is over one hundred points above annuity rates provided by the majority of providers of pension.
After learning how to buy government bonds, you will realize that it is not essential to purchase short term government securities because the yield of five years is lower than what fixed deposits from banks offer. Even though some banks provide high rates, bonds use SBI rates. Fixed deposits score above gilts because of their liquidity. Many banks allow you to break it without penalties. Nevertheless, if you want to withdraw, you will have to sell it to the market, and an issue will come from liquidity. Even though government securities are more liquid as compared to corporate bonds, there is no clarity in the liquidity of the upcoming structure.