Government securities are instruments issued by the government to borrow money from the market. They are also known as gilts or gilt edged securities
“Government security” means a security created and issued by the Government for the purpose of raising a public loan or for any other purpose as may be notified by the Government in the Official Gazette and having one of the forms mentioned in the Government Securities Act, 2006.
Depending upon the expiry date, government securities are divided into short term and long term securities.
Short term government securities are Treasury bills. They have a maturity of less than one year. There are three main treasury bills in India – 91 day, 182 day and 364 day.
Long term government securities are known as government bonds or dated securities. They have a maturity period of five years, ten years, fifteen years etc.
Now, government securities are popular investment assets for most of the financial institutions especially commercial banks. They prefer government securities because of many features unique to them.
Since financial institutions are bulk dealers of investable resources, government securities simultaneously provide the advantages of safety, liquidity and bulk investment opportunity. They thus possess the three unbelievably good qualities for a financial asset. Following features of government securities earned them the name of gilt edged securities.
- They have zero income default
- There is high rate of return
- There is cent per cent liquidity
The first feature indicates that if we make investment in G secs, we will not loss our money. This is because, government rarely fails financially and there is no risk for losing our money or there is zero income default.
Second feature is that they have a reasonably high rate of interest. In India, the G secs are allocated among the buyers through auction method. This auction ensures competitive interest rate for government securities. Given their zero risk default nature, the interest rate is very good for Gsecs.
Third feature of G secs is that they are very liquid. This is because the Gsecs are tradable in the stock m market. This means, to get money, the holder can sell it in the stock market. High marketability and tradability gives high liquidity for Gsecs. For commercial banks, by pledging government securities with RBI, it can avail a one day loan known as repo. Whenever a bank need money it can approach the RBI to take loans by pledging the g secs.
Because of the collective existence of these three features, government securities are known as ‘gilt edged securities.’