Will my investment value increase on investing in G-Secs?
When you invest in Government Securities (G-Secs), the return on your investment depends on various factors including the interest rate, maturity period, and prevailing market conditions. While the general trend is for the value of your investment to increase over time, with the interest payments compensating for inflationary losses, it's essential to note that the market price of G-Secs can fluctuate due to changes in interest rates, as well as supply and demand.
Let's take an example to understand this better:
Suppose you purchase a G-Sec at ₹100, offering a 7% annual interest rate, and a maturity period of 10 years.
Each year, you'll receive ₹7 as interest, summing up to ₹70 over the 10-year period.
At maturity, you will receive the principal amount of ₹100.
Now, consider a scenario where the market interest rate rises to 8% five years into your investment. This could result in the market price of your G-Sec dropping to ₹95, as new G-Secs offering higher interest rates become more attractive to investors. If you decide to sell your G-Sec at this point, you would incur a loss of ₹5 on your principal amount.
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