Long-term bonds aren't the most glamorous instruments in the world of investing. They would, however, provide solid returns now, at the apex of a rate-hardening cycle with positive inflation-adjusted guaranteed returns. So, money managers believe conservative investors looking for regular income could lock into some of these bonds, which come in maturities ranging from a decade to as long as half a century. Today, the time has become ripe to buy G-Secs as the rates are near a peak.

To meet the fiscal needs, Government Securities, popularly known as G-Sec Bonds, are debt instruments issued by the Central government. If we look at the Government bond in India, it is essentially a contract between the issuer and the investor, wherein the issuer guarantees interest earnings on the face value of bonds held by investors along with repayment of the principal value on a stipulated date. These long-term bonds can be issued by both Central and State governments of India. Government bonds issued by State Governments are also called State Development Loans (SDLs). G-Secs carry practically no risk of default and, hence, are called risk-free gilt-edged instruments.

Initially, most G-Secs were issued for the purpose of large investors, such as companies and commercial banks. However, eventually, GOI made government securities available to smaller investors such as individual investors, co-operative banks, etc. Bonds issued by the GOI and state governments come in a variety of varieties to meet the diverse investment objectives of investors. Government Bond interest rates, commonly known as coupons, can be fixed or floating and are paid out semi-annually. In most circumstances, GOI issues bonds in the market at a predetermined coupon rate.

Long-term bonds are new to Indian investors and are gradually gaining acceptability as they grow more popular due to their ease of access, according to Jitendra Solanki, a Sebi-registered financial advisor. Government securities, or G-Secs, are low-risk investments that can now be purchased through retail direct platforms. Solanki feels that these high-safety bonds can be utilized by folks nearing retirement who want peace of mind or those who want to generate a regular income stream for their differently-abled child.

Currently, interest rates are nearing a peak, providing a chance for investors to lock in long-term bonds. Conservative investors seeking high safety with no capital risk can purchase these bonds and spread their purchases over the next six months," said Vikram Dalal, Founder of Synergee Capital.

Investors can now purchase 10-, 20-, 30-, 40-, and 50-year bonds and receive interest rates ranging from 7.32% to 7.55%. These rates, according to financial advisors, are appealing because they outperform inflation. These bonds have no put or call options, and investors can earn an annual interest with no tax deduction at the time of purchase. Investors can improve their cash flows and minimize their reinvestment risk by purchasing bonds of varying maturities and constructing a ladder.

Although it is now easier to buy government securities at auctions thanks to the establishment of RBI Retail Direct, selling them in the secondary market can be difficult if you only have a little amount. According to financial advisers, certain of these bonds may be illiquid for smaller lots, and investors should not count on quick liquidity in such securities or buy them for trading.

Long-term government bonds have been purchased by institutional investors such as the Employees' Provident Funds Organisation (EPFO), insurance firms, pension funds, and even charitable trusts to meet long-term commitments to their clients, despite the fact that the majority of them do not trade in such securities.

Let’s delve into various Government Bonds in India:

Fixed-rate bonds

Government bonds of this nature come with a fixed rate of interest which remains constant throughout the tenure of investment irrespective of fluctuating market rates.

Floating Rate Bonds (FRBs)

As the name suggests, FRBs are subject to periodic changes in rate of returns. The change in rates is undertaken at intervals which are declared beforehand during the issuance of such bonds. For instance, an FRB could have a pre-announced interval of 6 months; which means interest rates on it would be reset every six months throughout the tenure.

There is another variant to FRBs, wherein the rate of interest rate is bifurcated into two components: a base rate and a fixed spread. This spread is decided through auction and remains constant throughout the maturity tenure.

Sovereign Gold Bonds (SGBs)

The Central Government issues sovereign Gold Bonds, wherein entities can invest in gold for an extended period through such bonds, without the burden of investing in physical gold. The interest earned on such bonds is exempted from tax.

Prices of such bonds are linked with gold’s prices. The nominal value of SGBs is reached by calculating the simple average of closing prices of 99.99% purity gold, three days preceding such bonds’ issuance. SGBs are also denominated in terms of one gram of gold.

Inflation-Indexed Bonds

It is a unique financial instrument, wherein the principal, as well as the interest earned on such bond, is accorded with inflation. Mainly issued for retail investors, these bonds are indexed as per the Consumer Price Index (CPI) or Wholesale Price Index (WPI). Such IIBs ensure real returns accrued with such investments remain constant, thereby allowing investors to safeguard their portfolio against inflation rates.

Another variant of such inflation-adjusted securities is Capital Indexed Bond. However, unlike IIBs, only the capital or principal proportion of balance is accorded with an inflation index.

7.75% GOI Savings Bond

This G-Sec was introduced as a replacement to the 8% Savings Bond in 2018. As noted from its nomenclature, the interest rate of such bonds is set at 7.75%. As per RBI regulations, these bonds can only be held by:

1. An Individual or individuals who are not NRI(s) in any capacity

2. A minor with a legal guardian representative

3. A Hindu Undivided Family

Interest earnings from such bonds are taxable under the Income Tax Act 1961 as per the investors’ applicable income tax slab. The minimum amount at which these bonds are issued is Rs. 1000 and in multiples of Rs. 1000 thereof.

Bonds With Call or Put Option

The distinguishing feature of this type of bonds is the issuer enjoys the right to buy-back such bonds (call option) or the investor can exercise its right to sell (put option) them to such issuer. This transaction shall only take place on a date of interest disbursal.

Participating entities, i.e. the government and investor can only exercise their rights after the lapse of 5 years from its issuance date. This type of bonds might come with either:

Call Option Only

Put Option Only

Both

In any case, the government can buy back its bonds at face value. Similarly, investors can sell such bonds to the issuer at face value. This ensures the preservation of the corpus invested in case of any downturn of the stock market.

Zero-Coupon Bonds

As the name suggests, Zero-Coupon Bonds do not earn any interest. Earnings from Zero-Coupon Bonds arise from the difference in issuance price (at a discount) and redemption value (at par). This type of bonds are not issued through auction but rather created from existing securities.

Now let’s look into some of the noteworthy advantages when it comes to investing in Government Bonds:

Because of the Sovereign guarantee, Government Bonds are one of the most secure types of investing in India. Risk-averse investors who seek superior security over the uncertainty inherent with market-linked instruments should consider investing in these assets. It is also an appropriate long-term investment alternative for entities with no prior experience investing in stock market tools.

Individuals looking to reduce the risk element in their entire investment portfolio while also achieving higher-than-average returns on their investments can invest a portion of their corpus in Government Bonds.