Government Securities (G-SEC’s) are excellent investment option in the current environment for those who only keep their money in fixed deposits. Primary motivation of Fixed Deposit investors is safety of capital and they are highly risk averse. G-SEC’s do not carry any default risk as they are Government Securities that come with soverign guarantee. The ROI (Return on Investment) in G-SEC’s depend on interest rate movement. There is an inverse relationship between interest rates and bond prices. So as interest rates fall, the return on G-SEC funds will rise. Every 1% fall in bond yields will lead to rise in bond prices by about 6.5%. So if in 1 year bond yields fall by 1%, the return on G-SEC funds will be close to over 15% (around 9% coupon + 6.5% appreciation in bond prices).
So recommend all fixed deposit investors to switch to G-SEC’s. This will dramatically improve your ROI in next 1-2 years. The only risk in G-SEC’s is continued rise in interest rates as increase of more than 150 basis points in interest rates can lead to marginally negative returns on G-SEC’s. But in the current economic environment, interest rates seem to be peaking out and not much hike in interest rates is expected further.
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