Government bonds, also known as government securities, are debt instruments that are issued by the central or state government to collect funds from the public at regular intervals at an agreed rate of interest to finance their various projects. The money raised from the issued securities is utilised in spending on new projects such as infrastructure, flyover, roads, schools, water canals, etc.

Investing in government bonds is considered one of the most preferred low-risk investment options for investors. It creates a well-diversified portfolio and cushions the risk of the overall portfolio.

Investment in government bonds can happen in various ways. Below are some of the methods by which we can invest in government bonds

5 Ways to invest in government bonds

• Gilt funds

Gilt funds are a type of debt mutual fund that invests only in government bonds issued by the RBI on their behalf. These debt securities are being issued from both state and central government and are heavily invested by institutional investors. It is also a retail investor-friendly investment option. Investing in the Gilt fund has no credit risk since the chances of the government going out of business are nil, thereby safeguarding the capital. Gilt funds generate good returns as well and anticipate interest rate movement in the market. An investor is taxed on a short-term capital gain basis and can be held for less than 36 months. If the funds are held for more than 3 yrs then the investor is liable to pay 20%.

• Sovereign gold bonds

Investors can invest in gold at a minimum price with a guarantee of safety from the government. The sovereign gold bonds go in a lock-in period of 8 years and have the option to redeem the same from the 5th year into the investment. It carries an interest rate of 2.5 % per annum. Investors can start investing from as low as 1 g to 4kg of gold. These bonds can be used as security while applying for loans.

• Conservative mutual funds

These are mutual funds that require an investor to invest in securities issued by a state or central government along with other debt, money market instruments, and equity and equity-related securities. The feature of low risk makes conservative mutual funds to be an ideal option for low-risk appetite investors. Its taxation resembles the gilt mutual funds. 

Conservative mutual funds predominantly invest in securities that are state or central. 

The pandemic brought unprecedented challenges that caused disruption in the functioning of businesses giving jolt to India’s economy. Amid GDP showing dismal growth, research firm Morgan Stanley analysed cyclical stocks to outperform defensive stocks as soon as the economy opens up to trade and people’s consumption returns to normalcy. The firm projected the stocks of Havells, Crompton, and Voltas to go up while its sales were impacted in the pandemic due to government regulations pausing to sell non-essential goods.
In the above case, the stocks of the mentioned companies are expected to perform well as the economy begins to improve, such stocks are cyclical stocks. The defensive stocks are those whose prices remain stable irrespective of the economic condition. Let us delve a little deeper to understand what these are and the difference between the two.

What are cyclical stocks?

Cyclical stocks are the type of stocks whose price is impacted by macroeconomic factors or systematic changes in the overall economy. The performance of the stocks is directly proportional to the economic condition – it varies with the rise and fall of economic performance. Several investors find this to be an apt opportunity to purchase stocks at their low price to sell them at a higher price to earn maximum profits.
Let us take the companies mentioned in the beginning. Companies Voltas, Crompton, and Havells are consumer durable brands. If the economy is on a growth trajectory, individuals will have savings to purchase AC, refrigerators, kitchen chimneys, etc. Therefore, pushing their stock prices to go high.
The pandemic inflicted job losses and paycuts that impacted the savings of an individual. In such times, purchasing an AC, or a TV set will be considered as a luxury or any discretionary spending. With tightened purses, people will be conscious about spending on luxury goods thereby pushing the stock prices to go down. Such stocks are called cyclical stocks. Other than consumer durables, automobile sector stocks are cyclical.

What are defensive stocks?

Defensive stocks are those stocks that deliver constant returns as dividends and remain resilient to the fluctuations in the stock market. The stability of the stock prices, irrespective of the economic condition, can be attributed to the nature of products that have a constant demand. For example – stocks of personal care, utilities, healthcare, FMCG remain unaffected by the swings in the stock market.
Having defensive stocks in the portfolio can prove to be beneficial since during a recession these stocks can deliver stable returns. However, there is a flip side to these stocks. The stocks tend to underperform while the economy is growing and will not deliver as high returns as cyclical stocks.

Cyclical stocks vs Defensive stocks

On 28th June 2021, India’s most valued conglomerate Reliance Industries faced a 10 % upside in its stocks, after the charts formed a golden cross. What is this golden cross that caused the stock prices of Reliance share to push by 10%? 

What is the golden cross strategy? 

A golden cross strategy is a type of technical indicator or, to be precise, a chart pattern where a stock’s short-term moving average crosses a long-term moving average to move upside. Traditionally, investors consider the short-term moving average to be a 50-day moving average and a 200-day moving average as the longer one. However, investors are free to choose any time frame of moving averages. One also needs to note that the shorter the average time frame selected for moving averages, the more sensitive it is to the everyday price movement as it could lead to false positives or frequent price movement.

A moving average can be calculated by adding closing prices of stocks for the no. of days divided by the days. For example, a 50-day moving average is calculated by adding the closing prices of its stock for 50 days divided by 50. A crossover between the two moving averages indicates a bullish trend for the long term. It also means the 50-day moving average is trading higher than the 200-day moving average. Investors identify this crossover of moving averages to be a strong buy signal. 

There are three stages to this golden cross strategy:

After spending hours watching stock market videos on YouTube and much discussions with colleagues, Parth decided to invest in the stock market hoping to make a huge fortune from it. Unfortunately, Parth learnt that those stocks failed to perform in the market as per the expectations and some stocks did not deliver the returns as estimated. He wondered what might have possibly gone wrong since a thorough study of fundamentals and research on basic details such as revenues, net profit, earnings per share (EPS), and price to earnings ratio (PE ratio) was done.

What happened to Parth is not a rare case. Many new investors decide to plunge into the stock market game on receiving tips and rumours and invest blindly. Being aware of the fundamentals as announced by the company in the quarterly report is not sufficient to trade. This is where the importance of reading the annual report steps in as it contains plenty of company information that is not available otherwise. It is a bulky report of 180-200 pages consisting of jargons that become an ordeal for an investor. At times, the pertinent content gets hidden making investors simply skip through the pages and invest based on the face value of a company. But, here we will talk about the essentials of the annual report that every investor should be looking into because knowing the fundamentals is not enough.

The adage of Murphy’s law states that “Anything that can go wrong will go wrong”. Participating in the stock market comes with its inherent pros and cons. As a new investor, it is essential to understand that despite a lot of analysis, expert guidance, and research, there still remains a significant possibility of bearing trade losses in the market – it is just how the market works. Markets, without a doubt, concur with Murphy’s adage.

Every trader or investor gets several bad deals on their stocks. The fact remains that you do not necessarily have to possess top-level multibagger shares in your portfolio to become profitable. While gains from stocks have no upper limit, the loss from stocks is limited to the value invested in them.

Yet, exiting a losing trade is more than just a financial transaction for investors. Along with the loss of money, it also has a psychological impact on the investor. And it is not unusual either.

Short positions and short trading in the Indian stock markets are legal ways for investors to make money during a stock’s weak conditions. Short-sellers seek to take advantage of declining stock prices. But sometimes, the situation changes rapidly, and market direction shifts contrary to their expectations. In such a situation, the shares that short sellers sold in the first place become more in demand, leading them to cover their short-run by repurchasing them faster. 

In simple terms, short-covering refers to the purchase of securities to cover an open short position. It shows the actual purchase of securities or assets by a short seller to replace those borrowed during a short sale.

Short selling occurs when an investor borrows securities, sells them in the open market and aims to buy them later for a reduced price. Short sellers bet and win by rooting for lowered stock prices. This can be compared with long investors who want the cost to go up.

The main question that arises in everyone’s mind regarding short-selling and covering is this: How can an investor sell something that s/he does not own? And how are they allowed to sell borrowed shares of a company to indulge in short trading? 

The simple answer is that the Securities and Exchange Commission of India (SEBI) enables this trade practice in the market and allows investors to indulge in short trading. The only prerequisite is that it needs to be started and finished within the same day of a market cycle; you cannot carry it over to the next day or period.

The short position is a procedure used when investors expect stock prices to fall in the short term, perhaps in the coming days or weeks. It involves borrowing stocks and selling them at a high price, then repurchasing them at a low price and returning them to the stockbroker.

The short selling process – how to do it?

To sell short, you first need to borrow the assets you want to bet against. Your broker gives you the details of potential stocks that might fall out in the coming days. You then request to borrow the shares. The broker attains another investor who owns the shares and agrees to return the shares on time. You get the shares after this journey.

Your broker lends you those shares as you are shorting a stock that you do not own. You can then sell the borrowed stocks at market value, buy those stocks at a lower price, and our broker will return the claims to the lender.

You usually do not need money to buy stocks through an intermediary. But in some cases, you have to pay for this trade. In the case of Hard-to-borrow (HTB) stocks, when there is a limited supply of stock for short selling, you must pay a daily stock borrow fee based on the price and availability of the stock.

When you read that a fund has 11% over five years, what does it mean? Does it simply mean that if a person invests in that fund for five years, they will get an 11% return? Or is it indicative of something else? 

It is difficult to understand the different types of mutual fund returns. But it is absolutely necessary to understand that all of the mutual fund performance tools, including CAGR and XIRR, only report the historical aspect of a mutual fund: its past performance trends. Through them, you get to know the performance of a fund during a particular period. They are not the predictions of future returns.

CAGR – Compounded Annual Growth Rate – is the most widely used tool to monitor the average annual growth rate of funds. The average annual growth rate represents the average annual return on an investment in a mutual fund over a period of time.

So, when you invest in a fund over five years, CAGR represents the fund’s average return in each of the past five years. However, CAGR does not give a clear picture of the volatility of the market. Linear growth, as highlighted by CAGR, is not accurate for any fund.