GUILT-EDGED SECURITY
Saturday Brainstorming Thought (291) 06/09/2025
A Gilt Edged Security, often shortened to “Gilt”, is a high-quality, low-risk, Fixed-income financial instrument issued by a RBI on behalf of the Central and State Governments
These are backed by the government which offers stable income and high liquidity
The term “Gilt-Edged” originated from the gilded (gold-edged) borders of paper certificate used for government bonds in the past and signifies the superior quality and safety of these financial instruments
Key Characteristics of Gilt Edged Security
1) Low Risk
Gilt Edged Securities are considered as the safest investment as they are issued by the government and have negligible default risk
2) Stable Returns
They typically offer fixed or floating coupon (interest) rates, providing investors with a reliable source of income
3) Government Backing
These securities are fully backed by the taxing power and revenue generation ability of the central and state governments
4) Liquidity
Government securities are highly liquid, meaning they can be easily bought and sold in the market
Type and Issuance of Gilt Edged Securities
1) Government Securities (G-secs)
These include both Central and State Government bonds, Treasury Bills and other debt instruments issued for the government’s market borrowing program
2) Issuing Authority
The RBI auctions these securities on behalf of the government
3) Forms
They can be issued in various forms, such as inscribed stock certificates, promissory notes or bearer bonds
The Gilt Edged Market
1) The Gilt Edged Market is essentially the market for the sale and purchase of these government securities
2) The Gilt Edged Market in India is a dominant part of the country’s debt market
Investment options for Gilt Edged Security
1) Direct Investment
Individual investors and institutional investors, such as banks can invest directly in these securities
2) Gilt Funds
Investors can also invest indirectly through mutual funds specializing in gilt securities, known as gilt funds, which offer a way to diversify a portfolio while managing credit risk
Types of Gilt Edged Securities in India
1) Short Term instruments
A) Treasury Bills (T-Bills)
Short-term debt instruments with maturities of 91,182 pr 364 days
They are issued at a discount to their face value and redeemed at par upon maturity
B) Cash Management Bills (CMBs)
Zero-coupon bills issued for maturities less than 91 days to meet the central government’s temporary cash flow needs
2) Long-term instruments
A) Dated Government Securities (Dated G-Secs)
These are long-term bonds with maturities ranging from 5 to 40 years
They pay interest (coupon) semi-annually and are actively traded in the secondary market
A) Fixed Rate Binds
Pay a set, unchangeable coupon rate
B) Floating Rate Bonds
Pay a variable interest rate that is reset at regular intervals based on a reference rate
C) Inflation Indexed Bonds
Protect investors from inflation by adjusting the interest rate based on a specified inflation index
3) State Development Loans (SDLs)
Debt instruments issued by individual state governments to fund their fiscal needs and development projects
4) Sovereign Gold Bonds (SGBs)
Government securities denominated in grams of gold
They are a substitute for holding physical gold and pay a fixed interest rate
These are issued by RBI on behalf of the Government of India
Advantages of Gilt Edged Securities
1) Safety
2) Liquidity
3) Regular income
Disadvantages of Gilt Edged Securities
1) Interest rate risk
2) Inflation risk
3) Lower returns
Limitations of Gilt Edged Securities
1) The Gilt Edged bonds tend to fluctuate with interest rates
2) Rate hikes will cause the price of a gilt to decline and vice versa
3) With global economic conditions improving, rates will bounce off near zero levels, which means gilt funds are likely to experience a trubelant ride
4) Investors looking to generate substantial returns may source better value in index funds
Gilt Edged Market
1) These are also known as the government securities market
2) As the securities are risk-free, they are known as Gilt Edged ie the best quality securities
3) The investors in the Gilt Edged Market are predominantly institutions such as commercial banks, LIC, GIC and the provident funds
4) The transactions in the government securities market are very large
5) Each transaction may run into several crores or even hundred crores of rupees
6) RBI plays a dominant role in the Gilt Edged Market through it’s Open Market Operations
Dated Securities
1) These are generally fixed maturity and fixed coupon securities usually carrying semi-annual coupon
2) These are called Dated Securities because these are identified by their date of maturity and the coupon
3) For example – 11.03% GOI 2012 ie it is a Central Government security maturing in 2012, which carries a coupon of 11.03% payable half yearly
COMPILED BY:-
Er. Avinash Kulkarni
9822011051
Chartered Engineer, Govt Regd Valuer, IBBI Regd Valuer
