NSE in collaboration with RBI has recently made it possible for investors to start investing in Government Securities, mainly the long-dated bonds and the treasury bills (T-bills). This allows access of these products to wider investor base against only large institutions like banks / insurance companies etc. who dominate the access to these sovereign fixed return asset class.
What are Gsec's / SDL's / T-bills?
These are terms for when the Govt. (Central / States) borrow money from people / institutions. Against this loan, the Government of India, promises to pay a periodic interest and also repay the principal at the end of the tenure.
What's the Risk?
Since these are backed by the Government of India, these are virtually risk-free investments. The guarantee from the Government is also called ‘Sovereign Guarantee’.
The loan which the government intends to repay within a year is called the Treasury Bills or T-bills. Loans which the Government intends to repay over many years are called the Bonds.
G-sec's - Dated Central Govt. Securities / State Development Loans (SDL's)
To meet the budgetary requirements, Central / State Governments raise loans from the market. When the central government's raise loans they are called 'Dated Govt. Securities ' when state govt. raise the loans they are called 'State Development Loans (SDL's)' . For both of these interest is credited half-yearly, and the principal amount is repaid at the time of maturity. Both 'Dated Govt. Securities ' & SDLs qualify for Statutory Liquidity Ratio (SLR), and they are also eligible as collaterals for borrowing through market repo as well as borrowing by eligible entities from the RBI under the Liquidity Adjustment Facility (LAF) and special repo conducted under market repo by CCIL. You may read this FAQ from RBI for more information.
T-bills:
There are three T-bills variants and they vary based on the maturity period. They are 91 days, 182 days, and 364 days. T-bills do not carry an interest component, in fact, this is one of the biggest difference between T-bills and Bonds. T-bills are issued at a discount to their true (PAR) value and upon expiry, its redeemed at its true value.
For Eg. A 91-day T-bill with par value Rs.100 shall be issued to you at a discount to its par value, Say Rs.97. After 91 days, you will get back Rs.100 and therefore you make a return of Rs.3. This is a guaranteed transaction, meaning, there is no risk of you selling below 100 (or above 100).
So if you have made Rs. 3 over 91 days on an investment of Rs.97, then at this rate, how much would you have made on a yearly basis?
Yield on t-bills = [Discount Value]/[Bond Price] * [365/number of days to maturity]
= [3/97]*[365/91]
= 0.0309*4.010989
=12.4052%
So in other words, the T-bill offers a return on investment of 12.4052%, but since you held it for 91 days, you will enjoy this return on a pro-rata basis.
Upon the maturity, the Government debits the T-bill from your DEMAT automatically, this is called ‘Extinguishment of Securities’ and the par value gets paid to the bank account linked to your DEMAT account.