Government bonds in India are essentially loans that individuals and organizations provide to the Indian government. These bonds serve as a means for the government to secure funds for various purposes, such as financing its fiscal deficit or supporting developmental activities. One key feature that makes government bonds an attractive investment is that they are considered among the safest options available, backed by the full faith and credit of the Indian government.
Government bonds come in different flavors, offering various tenures and features to cater to diverse investor preferences. Let's take a closer look at some of the common types of government bonds in India:
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Inflation-indexed Bonds
These bonds safeguard against inflation by adjusting the principal value based on prevailing inflation rates. This ensures a fixed real rate of return, making them suitable for risk-averse investors.
Zero-Coupon Bonds
These bonds can be bought at a discount to their face value and they do not offer periodic interest payments. Instead, investors receive the face value at maturity. They are ideal for long-term investors seeking a fixed return.
Sovereign Gold Bonds (SGBs)
These bonds are a unique offering, denominated in grams of gold. They provide an alternative to owning physical gold. SGBs have a fixed tenure of 8 years, but you can exit after the 5th year. They offer an annual interest rate of 2.5% on the initial investment and even provide capital gains tax exemption if held until maturity.
Fixed-rate Bonds
These bonds maintain a consistent interest rate throughout their tenure, offering a predictable income stream. They are an excellent choice for risk-averse investors.
Floating Rate Bonds (FRBs)
With variable interest rates linked to benchmark rates like the repo rate, FRBs provide investors with market-related returns. They are perfect for those seeking income with minimal interest rate risk.
7.75% Government of India Savings Bond
Offering a fixed interest rate of 7.75% per annum which is payable semi-annually, these bonds have a 7-year maturity period. They are available to individuals, Hindu Undivided Families (HUFs), and trusts.
