Overview
As the Indian economy continues to grow and evolve, investors in India are displaying a sophisticated level of acumen in their investment strategies. According to the latest report from S&P Global Market Intelligence, India which is currently ranked as the world’s fifth-largest economy is expected to overtake Japan and secure the position of the third-largest global economy by 2030, with a projected GDP growth of 7% by 2026-27.
Investors in India are taking an interest in trending investment options that are more diversified and offer higher yields. They are also adopting a cautious and risk-averse approach to investing that offers both security and consistent returns. Overall, the traditional mindset of investors is evolving, as investors explore newer investment landscapes and focus on risk mitigation and optimizing their returns. Investors are driving towards state government securities due to their attractive yields and relative safety.
What are State Government Securities?
The state governments in India maintain separate financial budgets. When the expenditure exceeds the available revenue, a fiscal deficit arises. To meet this shortfall, the state governments issue State Government Securities in the form of bonds to fulfill their additional funds/manage their state finances and fund their budgetary requirements. Each state has a certain limit per year to issue these bonds.
State Government Securities, which were formerly known as State Development Loans (SDLs) are regulated by the Reserve Bank of India and are issued in the form of bonds. The maturity of these bonds ranges from 10 to 30 years, although the issuer can opt for a different maturity period. Interest payments are made on a half-yearly basis and the principal amount is repaid upon reaching the maturity date. They are issued in the primary market through weekly auctions conducted by the RBI and are traded in the secondary market.
State government securities are offered for sale through auction processes. There are multiple-price auctions with competitive bidding, conducted by the Reserve Bank of India. The allotment procedure for these securities is similar to G-secs. Non-competitive bidding has also been introduced into the auction process. Retail investors can also place bids according to the non-competitive scheme through the RBI Retail Direct portal.
Scheduled Commercial banks (except Regional Rural Banks) and Primary Dealers can offer State Government Securities as eligible securities to the Reserve Bank of India within the framework of LAF Repos. State government securities meet the criteria for Statutory Liquidity Ratio (SLR), making them eligible securities for the SLR requirements of the bank.
Features of State Government Securities
To make informed investment decisions regarding State government securities, it is important to understand thoroughly their principal characteristics. Let’s closely examine these features.
- Maturity Period- Most state government securities come with a maturity period ranging from 10 years to 30 years. This feature allows investors to align their investments with their long-term financial goals, ensuring a steady and predictable investment timeline.
- Tax Application- The interest earned on these bonds is taxable as per income tax laws in India. When these securities are transferred, they incur a capital gain tax based on the holding period of the bond. If the holding period is equal to or less than 12 months, then the investors will be subject to short-term capital gains tax as per their respective slab rates. If the holding period is more than 12 months then long-term capital gains tax is applicable, which would be levied at a rate of 10% without indexation.
- The taxation on the Interest Income of these instruments is taxed as per the individual slab rates. However, no TDS is deducted from the interest.
- Tradable- State government securities can be traded in the secondary market.
- Redemption- State government securities can be redeemed at face value on maturity. However, investors also have the option to sell the bonds in the secondary market before their maturity date.
- SDL follows a specific borrowing structure to access funds from the open market. SDL debt instruments are the authorized securities of the RBI. Such securities are reliable collaterals that meet the bank’s Statutory Liquidity Ratio (SLR).
Now that we have understood about State Government Securities, let us explore a few of its advantages and disadvantages.
Advantages of State Government Securities
- Fixed Income– State government securities provide investors with a regular half-yearly interest payment which acts as a steady and predictable source of income from their investments.
- Lower Risk– These bonds are as safe and secured as G-secs as they are issued by the state governments and monitored by the RBI. As such, they carry a high level of safety and security to investors.
- Higher Yield– SGS offers higher returns compared to G-secs making them an attractive choice for investors looking for higher yields.
- Liquidity– These bonds can be traded in the market which allows investors to buy and sell them as per their needs in the secondary market. There is no lock-in period, providing investors with the benefits of both liquidity and adaptability.
Invest Now
Disadvantages of State Government Securities
- Credit Risk– Credit risk refers to the possibility of defaulting by the issuer or delaying the repayment of their obligations. These bonds are generally considered less risky because they come with an implicit guarantee from the sovereign entity. There might come a situation where the state may fall short of fiscal budget targets and may not be able to repay these loans. Hence, investors should carefully study before investing.
- Interest Rate Risk– There exists an inverse relationship between bond prices and interest rates. So, if the interest rate in the economy rises, it can harm the yield of bonds. It is crucial for investors to understand this relationship and should be careful about investing in a scenario where interest rates are on the rise. Investors can avoid this risk by holding these securities in long-term investments as the interest rates are volatile in the short-term.
- Liquidity Risk– The secondary market for government securities is dominated by institutional investors and the transaction size also tends to be higher. Liquidity is also influenced by the specific state issuing the state government securities, with developed states having higher liquidity than less developed ones.
How to invest in State Government Securities?
State Government Securities are managed by RBI through auctions conducted on the Reserve Bank of India Core Banking Solution (E-Kuber) system. Initially, only large entities such as insurance companies, mutual funds, pension funds, and banks could invest in State government securities. But now, even retail investors can invest in state government securities through the primary or secondary market. In the primary market, it can be purchased via RBI-conducted auctions. In the secondary market, investors can purchase through platforms like ours- TheFixedIncome
Investors can invest in State Government Securities on the platform of TheFixedIncome by following the below-mentioned steps:
- Sign up.
- Complete KYC.
- Place the order
- Make payment
- Once the payment is made, the bonds are credited to your Demat account.
Explore a variety of State Government Securities on TheFixedIncome platform:
Explore State Government Securities
Investing through TheFixedIncome has a lot of potential benefits like a dedicated relationship manager. This personal touch means you’ll have an expert to answer your questions, guide your investment decisions, and ensure you’re on the right track towards your financial goals.
TheFixedIncome also offers a user-friendly platform that allows you to conveniently track and manage your entire fixed-income portfolio in one place.
Are the State Government Securities Right for You?
- State government securities are issued by the government, they provide a high level of investment security due to their sovereign guarantee. They are an attractive investment option for risk-averse investors who prefer safety over potential returns.
- Many investors also opt to invest in state government securities to diversify their portfolios and achieve a more balanced risk-return profile.
- It is for investors with long investment tenures and holds till maturity because these securities can be volatile in the short term if interest rates change.
Conclusion
State government securities are generally considered safe and reliable investment options as the state government issues them. Nevertheless, investors should evaluate various aspects such as the associated risks and potential returns, before investing in them. It is also crucial to assess the financial health of the state government issuing the bonds as it can influence their capacity to repay. Summing up, state government securities can be a worthwhile investment option for individuals seeking higher yields over a longer investment horizon in a low-risk asset class.
Disclaimer: Investments in debt securities/ municipal debt securities/securitized debt instruments are subject to risks including delay and/ or default in payment. Read all the offer-related documents carefully.
FAQs
Q1. What are State government securities?
Ans. State government securities are issued by state governments to fund the fiscal deficit. These are managed by RBI and carry low risk.
Q2. What is the interest payment frequency for state government securities?
Ans: The interest payment frequency for state government securities is on a half-yearly basis.
Q3. Does the Reserve Bank of India regulate State government securities?
Ans: State government securities are issued by the state government and are managed by the RBI. But it’s important to note that RBI does not guarantee the repayment of these loans.
Q4. Is there a lock-in period for State government securities?
Ans: There is no lock-in period for State government securities.
