Long-term investments are a proven way to get wealthy. But they have their advantages and disadvantages. For example, equity provides high returns at high risks, and FDs offer a lower interest rate. Government bonds are better than both of these. They offer low to zero risk and regular returns.
Bonds are for regular income and long-term investment. Further, they provide higher fund security and many other benefits. Banks generally can not offer it. Hence they attract investors from all sections to buy government bonds.
In this article, we will discuss government bonds and their benefits. We will also mention the types of bonds issued by the government of India.
What are Government Bonds?
Government bonds are investment tools issued by central governments to raise funds. It helps the government with development and administrative costs.
Bonds are an excellent investment option for those who want guaranteed returns. There are different types of bonds based on their terms and benefits. See below:
- Treasury Bills
- Cash Management Bills
- Fixed Rate Bonds
- Inflation-Indexed or Capital Indexed Bonds
- Floating Rate Bonds
- Sovereign Gold Bonds (SGB)
- 7.75% GOI Savings Bond
- Bonds with Call or Put Option
- Zero-Coupon Bonds
Government bonds provide several benefits based on their types. They include long-time durations and high-interest rates. Further, they are also risk-free. So people prefer them based on their needs.
People can also buy government bonds for portfolio diversification. They can invest in equities and other options along with this instrument. Thus they can ensure the safety of their fund and get a good return.
Benefits of investing in Government Bonds
Here are some benefits retail investors get when they invest in government bonds.
Long-term investment with good returns
Bonds issued by the government allow long-term investment and returns. They are better than bank deposits, which offer low rates and short maturity periods. Hence many retail investors in India prefer them.
The 7.75% GOI Savings Bond is a good example of a government bond. It offers higher interest than an FD. These government bond rates are more attractive than other options. Also, they allow a 7-year maturity period. So retail investors often go for this bond type.
Another example is Sovereign Gold Bonds (SGB). It is a long-term bond with an attractive interest rate. The term of SGB is for 8 years. And it offers a 2.5% yearly return. But the investor can sell it after 5 years and get the current market price of gold. So those looking for a better option to own gold can invest in SGB.
Lower to zero risk and high stability of funds
The investors get a guarantee from the government on their bonds. But it depends on the type of the bond and its terms. It involves very low or no risk compared to the equity market.
Investments in stocks have high risks due to market factors. But government bond rates stay fixed. So those who prefer safe funds and fixed interest rates can choose to buy government bonds.
Also, it is a good option for investors who want to lower the risk in their portfolios. They can go for Inflation-Indexed bonds, Floating-Rate bonds, or Sovereign Gold bonds. They will have far lower risk than equity or mutual funds. On the other hand, stock prices go up and down based on market conditions.
Government bonds provide regular income
Government issues bonds with guaranteed returns. And it pays interest every six months or year. So it is a good investment for retail investors expecting a regular income. Also, it provides high safety for their fund.
Bank FD or deposits generally pay a low rate of interest. But, government bond rates are higher and allow a long maturity period. So the investors can hold a bond for 7 to 8 years, depending on the type and earn regular income.
GOI Savings Bond is such a type that gives a high-interest rate. SGB is another bond that offers around a 2.5% interest rate and the market price of gold on maturity. Both allow long-term and stable income with the safety of the investment.
Buying government bonds creates a diversified portfolio
Market prices affect investments in stocks, mutual funds, and unit-linked insurance. But government bonds are safe against market-related risks. Hence many investors consider it a balancing tool.
They diversify their portfolio by investing their money in different stocks and bonds. It helps balance the risk other investments may pose due to price fluctuations. The market may go down due to many factors. But the government bonds are still safe and ensure a return.
By investing in government bonds, they give money to the state. They are contributing to the country’s economic growth. Their funds help develop and improve the economy.
Thus they enjoy good returns from the equities in a diversified portfolio. They also get safe and regular income from bonds.
Provides liquidity like equity
Government-issued bonds provide liquidity. It is because banks are also involved in the market. So retail investors can buy and sell bonds like equity in the market. Hence they can enjoy the liquidity and safety of their funds together.
The market may go down at any time due to any situation. In this case, people may need their funds for emergency use. Hence investors diversify their funds in many investments. And they select government bonds to ensure that a part of their fund is free to use. Thus they can sell it out and get their money on hand whenever needed.
Bonds issued by the government provide many advantages. They provide the highest security of funds and surety of returns. We have discussed the main benefits of buying government bonds. So they can invest in them based on their present and future needs.
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