Most of us have multiple plans for our future or to follow our dreams such as planning a picture-perfect wedding, buying a house or foreign vacation trip. However, these plans and dreams could only be materialized if they are backed by sufficient finances. All these life goals can be achieved if you are able to save a sufficient amount of your revenue or income. So start saving as early as possible. It is suggested that at least you should be able to save 15-20% of your monthly income on regular basis.
Like saving money is key to achieve your future plans, investing the savings prudently is also equally imperative. Investment is vital because the saved money do not lose its worth / purchasing power due to inflation. Further, right investment can actually increase the value of our saved money. The opportunity cost of keeping saved funds idle is high for low income earners especially.
Any kind of investment always entails some kind of risk. Some avenues have high risk while others have relatively low risk. However, government securities have minimum risk or negligible risks. These securities have sovereign guarantee of government of Pakistan. Hence, credit or default risk on these securities is zero . Hence, you can invest your savings in these securities and kept it till maturity without any fear of losing money.
Investment Avenues
Although there are various government securities or bonds, here we have shortlisted those avenues which are equally feasible for individuals and institutions.
1. Market Treasury Bills (MTBs)
The Market Treasury Bills (MTBs) commonly known as T-Bills are short-term debt instrument issued by State Bank of Pakistan (SBP) on behalf of the Government of Pakistan. Currently, the MTBs are issued in scripless form and in multiples of Rs. 5000. You can choose from multiple range of tenor i.e. 3 to 6 and 12 months according to you investment planning. MTBs are only redeemable at maturity. However, you can sell MTBs in secondary market through your commercial bank. These MTBs are highly liquid and can be redeemed at convenience.
MTBs do not pay interest on the par value but are sold at a discount. Thus, their profit / yield is the difference between the purchase price and the face value. At maturity, amount equivalent to face value of the MTB will be credited to the account of the investor. For example, if you purchase one 12 months MTB at a discounted price of Rs. 4550. You will get Rs. 5000 at maturity hence a profit of Rs. 450 (9%). Usually, MTBs offer higher return than traditional banking products such as saving accounts.
Another important benefit of MTBs is that they are acceptable by the most banks as collateral for lending. The compulsory zakat on market treasury bills is not deducted at source. On the contrary, income tax is deducted on the profit amount at source.
MTBs are considered as risk free investment or zero credit risk as they are back by sovereign guarantee of the government of Pakistan and the primary custodian being the SBP. Know about other risk free investment avenues here.
The SBP holds auctions of MTBs on fortnightly basis on Wednesdays as per approved scheduled issued at the beginning of each quarter. The purchase of MTBs is based on bidding basis.
Snippets of Market Treasury Bills (MTBs)
- Issued by Government of Pakistan under Public Debt Act 1944.
- Multiples of PKR 5,000
- Tenor is 3, 6 and 12 months
- Issued at discounted price.
- Full amount payable on maturity.
- MTBs are issued in scripless (without physical) form
- Income Tax deductible as per prevailing rate
- No compulsory deduction of Zakat at source
- Ultimate custodian is the SBP. However, banks keep the securities in the Investor Portfolio of Securities (IPS) Accounts on behalf of their customers.
- Residents and Non-residents are eligible for investment.
2. Pakistan Investment Bonds (PIBs)
The Pakistan Investment Bonds or PIBs are medium to long term securities issued by SBP on behalf of the Government of Pakistan. Like Market Treasury Bills (MTBs), the PIBs are also have scripless structure. However, these bonds are available in multiples of Rs. 100,000. Know about MTBs here.
PIBs are coupon-bearing debt securities quite the reverse of MTBs. In simple words, these bonds are issue-able at face value and redeemable at face value. Interest is payable to the investor every six months at a fixed rate as consideration thereof. The profit rate or coupon rate on these bonds is payable until maturity, if not redeemed early. The PIBs offers a very good competitive return while keeping the investment secure. PIBs are the choice if you want risk free investment for longer period. The repayment of face value and profit is guaranteed by the Government of Pakistan and therefore the chances of a default in the principal and profit payouts from these bonds are nearly zero.
Although PIBs are only redeemable at maturity. However, PIBs are eligible for sale and redeem freely in the secondary market.
The tenor of these bonds are 3, 5, 10, 15 and 20 years.
Similar to MTBs, these bonds are also acceptable as collateral or security for lending. Further, Zakat is not deducted on these bonds while income tax is deducted on the profit amount according to the prevailing rate.
The auctions of PIBs are conducted on the basis of pre-announced auction calendars. The calendar provides the details of auction and settlement dates, target amount and maturity amount.
Snippets of Pakistan Investment Bonds (PIBs)
- Sovereign guarantee and issued by Government of Pakistan under Public Debt Act 1944.
- Multiples of PKR 100,000
- The tenor is 3, 5, 10, 15 and 20 years
- Fixed & Semi-annual coupon payment.
- Issued in scripless (without physical) form
- Income Tax deducted as per prevailing rates; however, Zakat is not applicable.
- The ultimate custodian is the SBP. Banks keep these securities in IPS accounts on behalf of their customers
- Residents and Non-residents are eligible for investment.
3. GoP Ijara Sukuk (GIS)
Sukuk are Bonds / certificates of equal value which evidence undivided ownership or investment in the assets using Shariah principles. Unlike a conventional bond, a Sukuk represents interest in an underlying asset. The Sukuks of Government of Pakistan (GoP) are commonly know as GoP Ijara Sukuk (GIS). GIS are medium term security having a tenor of 3 and 5-years.
The return on this instrument called rental is paid on semi-annual basis at a floating rate. This means that the rate of return is announced every 6 months.
Like MTBs and PIBs, these security also backed by sovereign guarantee and there negligible risk of credit default or non-payment of rental.
GIS is also eligible as collateral for lending purpose. Further, these securities are highly liquid and tradeable in secondary market.
Sukuks can only be purchased through primary dealer banks as announced by the SBP.
Non-resident Pakistanis are also eligible to invest in GIS.
Recently, GOP raised Rs. 76.384 billion through 5 year Sukuks on April 24, 2020.
Snippets of GOP Ijara Sukuk
- Issued by Government of Pakistan under Public Debt Act, 1944.
- Multiples of PKR 100,000
- Issued for a tenor of 3 years.
- Coupon payment on semi-annual basis at floating rate.
- Issued in a scrip less (without physical) form
- Income Tax deductible as per existing law, while Zakat is not.
- Ultimate custodian of securities is the SBP. Banks keep Sukuks in the IPS accounts on behalf of their customers.
- Residents and Non-residents are eligible for investment.
For latest rate of return on these securities and auction calendar, please visit SBP website.
If you prefer watching video over reading then here is our short video on the risk free avenues in Pakistan.
How to purchase them, any idea please?