Government bonds are rarely explored as an investment option by retail investors, due to numerous reasons. The current scenario, however, offers a unique opportunity to the retail investors to add government bonds to their portfolio

Unlike equities and some other popular investment options where they have fair understanding of investment process, retail investors have remained away from Government Bonds in the past. With bond yields touching close to 10% in some of the central government bonds, it is probably the right time for investors to explore the option of investment in government bonds, especially, considering the fact that the equity market has hit investors really hard.
 

What are the benefits of buying government bonds and why should retail investors add these securities to their portfolio? The reasons are many. The first reason is the prevailing high yield to maturity on these bonds. The yield to maturity (YTM) on a bond is the rate of return that an investor would earn if he bought the bond at its current market price and held it until maturity. Bond prices have fallen substantially during the last one month because of various measures announced by RBI to control the fall in the rupee. With the fall in prices of bond, the yield to maturity of the bonds has gone up, making them an attractive investment option for a new investor. While existing investors in these bonds are bleeding, the new entrants can enjoy the benefit of high returns.
 

The second reason for buying these bonds is that they provide investors an option to hold these bonds for fairly long period. This essentially means that long-term return can be expected from these bonds on a consistent basis. For instance, today an investor can buy 8.32% government security with a maturity year of 2032 and expect a yield to maturity of approximately 9.5% for next 20 years, which will be a good return for a fairly long period of time. The investor must hold these bonds till maturity to get this benefit. Selling of bond in between may not assure this return. If you compare this return to the 10 year return offered for National Saving Certificate (NSC), return from government bond looks very attractive.
 

The third benefit of buying government bonds is that they have nil credit risk. Technically nil credit risk can be debated, but we can expect that the government of India will not default on its obligations as it has never done the same in past. The absence of credit risk makes these bonds an attractive investment option.
 

Now the most important question, “How can these bonds be bought?” The first requirement to buy these bonds is that you need to have a demat account. There is no need to open a separate demat account for these bonds. Primary dealers authorized by RBI provide facility to buy government securities. The list of primary dealers is available on the website of RBI. You need to check with these primary dealers about the facility that they provide to buy government bonds. Some online portals are also available which provide this facility.
 

Last but not the least, should you buy these bonds? Government bonds are safe and are currently offering good return option for long term. However, investments in these bonds are taxable and you need to check post tax return. Even if we consider post tax return, these bonds are looking attractive at the current yield to maturity return.
 

(Vivek Sharma has worked for 17 years in the stock market, debt market and banking. He is a post graduate in Economics and MBA in Finance. He writes on personal finance and economics and is invited as an expert on personal finance shows.)