Government securities form an important element of debt mutual funds, an investment avenue chosen by a large section of Mutual Fund Investors.
1. What do you mean by G-Sec or Government Security?
Tradeable instruments issued by the Central or State governments are known as government security OR G-Sec. These instruments acknowledge the debt obligations of the government. The securities that are short term with maturities of less than one year are called treasury bills, while those with maturity of one year or more are called government bonds or dated securities. Central government issues treasury bills as well as bonds or dated securities and state governments issue only bonds or dated securities, called the state development loans. These are called risk-free gilt-edged instruments as they are issued by the government and carry no risk of default.
2. Who are the participants in G-Secs market?
Commercial banks, primary dealers (PDs) and institutional investors like insurance companies are major players in the G-Secs market. Some of the other participants are mutual funds, regional rural banks, co-operative banks, provident and pension funds. Corporates buy and sell G-Secs to manage their overall portfolio, while FPIs are allowed to participate in G-Secs market within the quantitative limits prescribed from time to time.
3. What are the reasons for G-Secs being volatile?
The demand and supply of securities determine the price of G-Secs and hence their prices fluctuate sharply in the secondary markets. Factors such as interest rates in the economy or other macro-economic factors like liquidity, inflation etc. also influence this price. G-Sec prices also get affected by developments in other markets like foreign exchange, money, credit and capital markets. Prices of G-Secs in India also get affected by developments in the international bond markets, especially the US Treasuries. Change in repo rates, cash-reserve ratio and open-market operations and other policy actions taken by RBI also affect the prices of G-Secs.
4. How does one buy G-Sec?
A few broking platforms offer investors an option to buy G-Secs directly. Alternatively, they can also be bought using the mutual fund route. If held for more than three years, Mutual funds are tax efficient as they offer indexation benefits. However, investors are liable to pay tax for the interest received from a G-Sec.
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