What are government bonds and how to invest in them? Are they better than the mutual funds?Asked
Government bonds are like any other bonds, issued against a promise to pay periodic interest and repay the principal at maturity. The difference is that these bonds are issued by the Government of India, and therefore carry the lowest risk.
There are 2 ways in which you can buy government bonds:
You can directly buy government bonds from State Bank of India and its associates, or from specified private sector banks. They are not traded on the exchange and therefore can only be bought in physical form. Such investment is subject to minimum investment as may be prescribed by the Government of India from time to time. Thus, retail investors may not prefer this mode.
A better method to invest in government bonds is investing your money in mutual funds. Depending upon the risk that you are willing to take, you can invest in debt oriented funds (less risk) or equity oriented funds, with only a small part allocated to buying government bonds to hedge market risk.
The biggest advantage of mutual fund is that they pool money from many investors. Thus, a retail investor may not have the money to in government bonds, but many such retailers collectively will. Mutual Funds facilitate investment in government bonds, and plans like Systematic Transfer Plan allow the manager to transfer funds from debt securities to equities if they anticipate an upswing in the market, and back into debt if they anticipate a downswing, thus maximizing returns to the investor.
There are many mutual fund schemes like Moderate Risk Portfolio For Short Term With Rs 1000 Min, Better than FD returns with Debt Mutual Funds, and Hybrid Portfolio - Debt Oriented For Short Term that have provided higher returns than direct investment in debt market.
Thus, mutual funds are a better way of investing in government bonds.
Government bonds are a type of loan from investors to the government. These bonds are issued by the government itself to raise money it needs for government spending.
To invest in government bonds investors need a demat account.
Advantages of government bonds are-
· Tax free income
· Low risk
· High liquidity
· Easy to handle
Even though most governments have close to zero default risk an investor must assess risks associated with the country including country risk, political risk, inflation risk, etc., before investing in government bonds.
Government bonds are fixed income securities issued by the government to general public. The purpose of these funds is to meet government's long term financing needs. These securities usually have a long tenure over which the investors are paid a fixed coupon every year until maturity and at maturity the principal amount is repaid. There are several variations in government securities like semi annual payments, bonds with tax benefits etc.
An investor can invest in government bonds either through:
1. Banks and Primary dealers
2. Mutual Funds
Investing through banks and primary dealers is the direct form of investing in a government security. In this format the securities are stored in the demat account of the individual investors.
Investing though debt funds is the indirect form of investing in government securities where the investors hold the units of the fund which has invested money in various government securities. Investing via mutual funds gives the investor the benefits of professional management, any-time exit opportunity, SIP etc.
To read more about debt funds please click here
Some of the top performing debt mutual funds for long term are:
A bond issued by a country's government, promising to repay borrowed money a fixed rate of interest at a specified time. Bonds are issued by government in order to finance their spending. Government bonds especially suit pensioners looking for a safe investment option that can give them assured returns for the long term.
Characteristics of government bonds:
Mutual fund is better option than government bond as
Government Bonds are securities issued by the government in order to finance their government spending. Default in case of Government Bonds are unlikely and so they are considered to be very safe for investment purpose.
Following points are to be kept in mind while investing in Government Bonds:
· It is a debt instrument.
· The tenure for a bond is fixed say 10, 20, 30 years.
· It is a way to borrow money from the public, for which they pay interest to the investor.
· It is issued in home currency. If issued in foreign currency then it is sovereign bond
· Guarantee is given by the government, so very safe for investment.
At present Government Bond for 10 years in India gives a return of 7.2%, which is more than what an investor gets in post office and fixed deposits. Investing in bond is preferred not just by the risk averse investors, but also by investors who have parked their funds in mutual funds or equities, since some investments need to be made in less risk instruments.
The yield on a bond keeps on changing on a regular basis as decided by the RBI. Depending on that an investor can buy and sale the bonds on open market, provided the counter party is available.
An investor looking to diversify the investments can definitely consider investing some portion of his portfolio in Bonds.