G-Secs are now within the reach of the retail, individual investors. Recently the National Stock Exchange opened a digital platform for buying and selling of government securities (called G-Secs) for the retail investor. In the past on account of the complexities of G-Sec purchases and also because a large amount of money was required to be invested, individual investors kept away from G-Sec investing. Both these limitations have now been removed. Today all you need is a demat account (apart from money of course) to purchase G-Secs as an individual.

What are G-Secs?

G-Secs are securities issued by the Government of India and are therefore fully safe. A G-Sec is a debt instrument of the Government of India. It is a loan given by the investor to the Government. The investment is also a liquid investment. Supposing you purchase a 30 year G-Sec and would like to sell it off after 10 years, you can do so in the secondary market through the demat account. The maturity period of G-Secs are for example 91 days (3 months), 181 days (6 months), 364 days (1 year) and extend to 10 years, 19 years, and even 30 years.

Returns on G-Secs

For an unexplained reason the yield on G-Secs is currently better than fixed deposits in banks. For example the 3 month G-sec yield is 6.8 %, compared to the fixed deposit average of 6.25 %. The 6-month G-Sec yield is 7.1 %, the 1-year yield is 7.2 %, while the 30-year G-Sec yield is 8 %. Seen purely from a return angle, G-Secs are better than fixed deposits in banks. The best way to get advantage of this is to be clear about the period of holding, (3 months, 6 months, 10 years, etc.) invest a sum of money and hold the investment till maturity.

Limitations of G-Secs

There are however considerations other than just returns that need to be considered. Some of these are:

1. Liquidity: While on paper you can sell the G-Sec whenever you want to, in practice this may not be possible. The G-Sec market for the retail investors is new. Therefore the number of people owning G-Secs or wanting to buy G-Secs is very small. So when you want to sell, the chance of finding a buyer is very low. It will take a number of years before conditions that create liquidity develop in this market.
2. Understanding product return: This purchase of this product requires a different kind of knowledge – especially the ability to calculate yields. When you purchase G-Secs, you have to bid. The bid is at a discount of the face value of the G-Sec. The discount is part of the yield on this product.
3. Cannot be used as collateral: G-Secs are not accepted by banks as a collateral for a loan, unlike say fixed deposits, life insurance endowment, etc.
4. Fixed Return over a 10-year (or more) period: In case an investor (of a long term G-Sec) is unable to sell the G-Sec during the maturity period (when he or she may require the cash), due to lack of buyers in the market, it effectively means that the investment is locked up for the the 10 or 30-year period. 10 or 30 years is too long a period to lock up at a fixed rate of return. No one knows how inflation will behave over such a long time. There are high chances that the rate of inflation could be higher than the rate at which the investment is bought.

Conclusion

If these limitations are not important to a particular investor G-Secs is a safe investment. And currently the 1-year G-Sec looks a good bet for short term investing. G-Sec is not a long term investment for the retail buyer as is being publicized by many in the media. The risks of holding a fixed income security for a very long time is very high. It is suitable for the short term of 1 year or less.