If you are risk-averse, and do not trust the stock markets or mutual funds to keep your money safe, your main options - till recently - were bank fixed deposits or National Savings Certificates.

Now you have one more option: investment in government securities (gilts).

Thanks to a recent government initiative, anyone with a demat account can buy or sell gilts through any broker authorised by the National Stock Exchange or the Bombay Stock Exchange to do so.

The advantage with gilts is simple: there is no question of you ever losing your capital. You can invest as little as Rs 1,000 (i.e. 10 units of gilts of Rs 100 each) or as much as you can afford. And unlike bank FDs, the government is not unkind enough to deduct tax at source.

But before you jump in and buy your first gilt, you need to understand the basics. First, you have to know what you are buying.

These securities come with esoteric names like CG2003 or CG2032. The names tell you when the gilts mature. The CG2003 matures later this year, and the CG2032 - you guessed it - matures 29 years later.

Another thing you need to know is that 'effective' interest rates are determined by the market, never mind what the formally mentioned rate is. In fact, all gilts maturing around the same period will give you similar interest yields.

This is because the market automatically adjusts the price of a security for any given interest rate (also known as coupon).

The CG2011 bond with 12.32 per cent coupon and the CG2011 bond with 11.5 per cent give you roughly the same yield: around 5.95 per cent. So don't automatically opt for the higher coupon bond when you buy. You will be paying a higher price for it.

The next thing to check with your broker is whether the price quoted is the 'clean' price or the traded price.

If you buy gilts on, say, January 31, the seller is entitled to interest on his holdings till that date -- you are entitled to the interest only for the period after that.

Since the government pays interest once in six months, your price will be the 'clean price' plus interest for the number of days that have elapsed since the government last paid interest (usually September and March). This is paid when the transaction is settled.

Did we tell you that gilts carry no risk? Er, we goofed a bit. While they carry no default risk, they face loads of interest-rate risk.

This is because their prices are sensitive to interest rate changes and expectations of rate changes. When interest rates fall - or when the market senses that they may fall - the prices of gilts rise to bring down yields. Conversely, when interest rates rise, prices fall.

Thumb rule one: longer maturity gilts face greater price volatility than shorter maturity ones. Thus, if interest rates fall, and you are sitting on longer-term paper, you make a bonanza since prices rise faster in these bonds than in instruments of shorter maturity.

So much for theory. The moot point is: Can a retail investor really make money in gilts? Experts think this is still possible.

The benchmark yield on the 10-year gilt is currently around 5.85 per cent, and since interest rates are still ruling weak, there is a possibility of capital appreciation if that actually happens.

Saravana Kumar, head of fixed income schemes at SBI Mutual Fund, feels that those planning to invest in gilts should do so right away while there is still some upside left.

This view is echoed by Suresh Soni of Franklin Templeton Mutual Fund, who feels that some amount of gilts is necessary in any investor's portfolio.

"These are the best quality papers (since they carry a sovereign guarantee) and have liquidity."

However, he advises small investors against trading. They should pick them up for investment purposes rather than for short-term price movements.

According to Kumar, investors seeking capital gains in the near future could try investing in longer-dated papers because that is where the maximum price appreciation is.

Some of the papers he mentions are CG2022 (coupon: 8.5 per cent), CG2017 (7.46 per cent) and CG2013 (9.81 per cent). Investors who like to test the waters before plunging in could look at the portfolios of g-sec funds. Most fund managers keep a close watch on interest rates, and if they sense a shift, their portfolios are sure to reflect the changing preferences.

Gilt-edged thumb rules

Rule one in the game is to understand the relationship between time and yield.

Longer dated gilts tend to be more volatile in prices; the shorter ones offer lower yields but are stabler.

As a rough rule of thumb, a one basis point movement in interest rates (100 basis points make one per cent) could lead to varying movements in prices: about 1 paise in a one-year paper, three-four paise in a five-year paper, six-seven paise in a 10-year paper and 12-14 paise in a 30-year paper.

The best option for investors who don't want to watch gilt price movements daily is to find an acceptable yield and an acceptable holding period.

If you find a five-year paper giving you 5.6 per cent and you are fine with that, don't worry if interest rates rise tomorrow and the price of your security falls. Rest assured, that when the government redeems the paper five years hence, you will get the full face value of your gilt.

A bonus: if prices crash further, you can certainly sell your holdings and make a capital gain.

A final caveat: interest on gilts is taxable beyond the Section 80L limit.

Since banks currently offer higher interest rates for shorter-term deposits, investing in gilts makes sense only if you want to hold on to them for longish periods.