Government bonds are financial instruments issued by the government to raise funds for public projects. This type of bond comes with a fixed rate of interest and tenure. Thus, essentially, when you buy a government bond, you are lending money to the government to invest in some public project for a certain tenure for which the government is providing you with a fixed rate of return which is paid annually throughout the tenure of the bond, and the principal (invested money) along with the last instalment of interest is returned at the time of maturity.
For instance, if you invest Rs 10,000 in a bond that pays 7 per cent interest per annum for 10 years, you would receive Rs 700 every year as interest till the bond matures. This interest is called coupon rate.
Why Are They Considered Safe?
The reason government bonds are considered safe is that they come with a sovereign guarantee. Essentially, the government commits to repayment of the debt (amount invested). As such, the probability of default in this debt is nil. Stocks and mutual funds are susceptible to market fluctuations, but government bonds provide stability and fixed returns.
Market volatility as a result of economic crisis, political turmoil, or international financial meltdown has an adverse effect on equity investments. As such, investors often tend to park a portion of their investible surplus in some fixed-income instrument, such as government bonds, treasury bills, state development loans, government securities (G-secs), among others, for diversification and safety.
For instance, when the Covid-19 pandemic hit the stock market with never-before-seen volatility, government bonds witnessed a huge spurt in demand. Predictability of returns made them even more popular, as people wanted to save their wealth from the effect of market volatility.
How They Compare to Other Investments?
Government bonds generally provide lesser return compared to equity investments and corporate bonds.
For instance, a mutual fund might provide 12-15 per cent returns in a good year, but could also result provide negative return during a bear market phase. On the other hand, government bonds, with their fixed rate of return ensures that your principal remains safe, while offering steady income even during a market dip.
Who Should Consider Government Bonds?
Government bonds are ideal for conservative investors seeking safety over high returns. Retirees and near-retirees invest in such bonds to ensure a steady income flow. Young investors wanting to diversify their portfolios can include bonds to balance the risk that comes with high-return investments, such as stocks and equity-oriented mutual funds.
How To Invest In Government Bonds?
One can invest in government bonds through various avenues, such as Reserve Bank of India’s (RBI’s) Retail Direct Scheme, securities markets, and also through mutual funds specialising in bond investment. Many bonds are also traded on stock exchanges, thus allowing retail investors with a dematerialised account to participate in the buying process.
Government bonds are a safe and secure investment option for those looking for stability, and assurance of returns. While the returns from government bonds might not be able to offer high returns as those offered by equity investments, the promise of sovereign guarantee along with steady returns with little risk make them an ideal debt investment option for conservative investors.
