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Debt Mutual Funds vs. RBI Retail Direct: Which is Better?

By Sujaini Biswas


Updated on: Oct 27th, 2022


7 min read

After the Government of India launched the RBI Retail Direct platform, it gave investors the ability to directly purchase government securities (G-secs). Earlier, mutual funds were the only way a retail investor could invest in government securities. But now, investors are free to invest in G-secs without the need for any intermediaries. 

So, the question arises, to invest in government securities, is RBI’s Retail Direct better or mutual funds? To find out more about this, you can check out the sections below. 

Debt Mutual Funds vs. RBI Retail Direct:  Parameters

When you think, what is the better way to invest in government securities, there are a lot of parameters that you need to take into consideration. They are:

Available variety

When you choose RBI Retail Direct Scheme, you get to open a Retail Direct Gilt account with the Reserve Bank of India. It will provide you access to the RBI Retail Direct Portal, from which you can invest in 4 types of government securities. They are:

  1. Sovereign Gold Bonds (SGBs)
  2. Treasury Bills (T-Bills)
  3. Central Government Bonds
  4. State Government Bonds

On the other hand, if you wish to purchase government securities through mutual funds, you can do it with the help of debt mutual funds. They are funds that have the investment objective of generating capital by purchasing government securities. 

When you invest in them, the fund manager will invest 80% of your capital in various government securities. Debt mutual funds primarily invest in long-duration bonds that are either issued by the Indian Government or State Governments. The types of debt mutual funds through which you can invest in government securities are:

  1. Gilt Fund
  2. Gilt Fund With 10-Year Constant Duration

Transaction fees 

When you use RBI Retail Direct, you do not have to depend on any intermediary for buying government securities. Instead, you deal directly with the Reserve Bank of India, and therefore this method does not involve any transaction fees. 

Alternatively, when you are investing in debt mutual funds for purchasing G-secs, you have to pay a transaction fee. Every mutual fund has an expense ratio. As per SEBI’s regulations, a mutual fund scheme can charge a maximum of 2% of your total investments in the form of an expense ratio. 

Let’s take an example for better understanding. 

SBI Magnum Gilt Fund Direct-Growth Plan has an expense ratio of 0.46%. That means if you invest Rs.10,000 in this scheme, this fund house will charge you Rs.46 as a fee for handling your investment. Apart from the expense ratio, a mutual fund does not charge any other transaction fees. 

Minimum investment amount

When you plan to invest in government securities via RBI Retail Direct, the minimum investment amount starts from Rs.10,000. 

However, the story is different when it comes to purchasing G-secs with mutual funds. You can either choose to make monthly instalments via an SIP (Systematic Investment Plan) or pay a lump sum amount while starting. The minimum investment amount for the lump sum plan is Rs.5,000 and for the SIP is Rs.500. 

Maturity time 

When you invest in government securities via the RBI Retail Direct platform, your investment’s maturity will depend on what kind of security you are buying. 

For example, the maturity period for T-bills can range from 91 days to one year. 

On the other hand, if you choose a close-ended debt mutual fund to invest in G-secs, the maturity period can range from 3 to 5 years. Furthermore, there are some gilt funds of special category that have a lock-in period of 10 years. 

Liquidity options

If you invest in government securities through RBI Retail Direct, liquidation can be a bit of a challenge. First, you have to take the responsibility to sell off your G-secs to a willing buyer. Now, as government securities aren’t traded widely in the retail market, it may be a bit difficult for you to find a buyer. It may so happen that you have to sell your G-secs at a lower price, thereby incurring a loss.  

So, buying government securities from the RBI Retail Direct portal has the potential to limit your liquidity options as well as your exit strategy. 

However, if you choose debt mutual funds to invest in government securities, liquidity and exit are far easier. The reason behind this is that there is a huge market of institutional buyers that buy and sell G-secs on a regular basis. However, this market is only accessible to institutional investors. You, as a retail investor, cannot gain direct access to this market.  

Applicable taxes

Purchasing government securities through RBI Retail Direct will provide you with a semi-annual or annual interest. However, it is taxable as per your current tax slab rate.

Let’s take an example for better understanding. 

Suppose, according to your current income, you fall under the 30% tax slab rate. Now, you receive 7% interest from your G-sec investment. So, your post-tax returns will fall to 4.67%. 

On the other hand, if you invest in government bonds through debt mutual funds, you have the chance to enjoy a few tax benefits. However, it is only applicable if you are holding your G-secs for the long term. 

If you hold your government securities for more than 3 years, long-term capital gain tax is applicable, and the gains from your investment will be taxed at the rate of 20%. Furthermore, you can also get indexation benefits.  

Alternatively, if you hold these securities for less than 3 years, the short-term capital gain tax will be applicable, and the gains from your investment will be taxed as per your current tax slab rate. 

Note: The data in this article is based on the information collected on 18 October 2022. 

Now that you have a clear idea of debt mutual funds vs. RBI Retail Direct, you can make an informed decision. If you belong to a lower tax slab, RBI Retail Direct is a better option, and you can save on investment costs. However, if you plan to hold your investment for over 3 years and fall within a high tax slab, debt mutual funds are a convenient option. This option offers better liquidity.  

The final choice, though, rests with you. In addition, if you are a new investor, you might opt for assistance from professionals. 

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About the Author

A manager by day and a sloth by night. I enjoy writing on topics like personal finance and investments. With 10 years of experience in fintech, creating content that resonates with readers is my forte. Read more


Quick Summary

After the launch of the RBI Retail Direct platform, retail investors can now directly purchase government securities. This article compares investing in government securities through RBI Retail Direct with debt mutual funds based on parameters like available variety, transaction fees, minimum investment amount, maturity time, liquidity options, and applicable taxes, to help investors make an informed decision.

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