How safe are government securities? Is this a question bothering you? Welcome. Many people have asked
me this question, and I have struggled to explain the answer.
Central Government securities are 100% safe. These are what are called ‘Soverign Paper’ and is guaranteed
by Pratibha Patil – the Government of India! Interest rate payments, principal, payments on the due date, or
on maturity are all guaranteed by the Government of India.
Are there risks? Yes there are risks associated with it:
a. Interest rate risk: If interest rate changes, price will change.
b. Inflation risk: the Government may be paying you 6.76% interest, if the inflation is averaging 9%,
you run an interest rate risk.
c. There is no call risk
d. There is not much liquidity risk in CG securities, but you may find liquidity risk in State Government
In government instruments like PPF you run a risk that the government may pay you in instalments. If you go on 2nd Dec 2014 to get your PPF encashed, it is possible that the government tells you “Please take Rs. 5lakhs now and the balance Rs. 12 lakhs will be paid to you in 12 annual instalments of Rs. 1 L each, with interest”
Has this happened in the past? Heck no. But any investment where the other person who is taking the
money can make the rules, you are at risk.
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