Should you buy Government Bonds directly or take the Mutual Fund route?

For people who prefer not to enter the choppy waters of equity markets directly, government bonds and mutual funds are often viewed as the better options. These investors prefer the relative safety of government bonds and mutual funds over the potentially greater returns from directly buying and selling equities. However, many investors find themselves unable to pick between bonds and mutual funds when it comes to deciding upon one out of the two. Moreover, many retail investors remain unclear about how to purchase government bonds and from where to buy government bonds.

What are Government Bonds?

When governments need to raise large sums of money to fulfill their spending needs, they issue debt instruments called bonds. These debt instruments, also called government securities or G-secs are a contract between the government and the buyer to repay the principal along with interest on the specified date. Both retail and institutional investors can buy government bonds. The greatest advantage when you buy government bonds is that they come with a sovereign guarantee, making them one of the safest investment options. There are various types of government bonds available in India such as:

Treasury Bills or Zero-Coupon Bonds

These bonds do not pay any interest. Instead, they are issued at a discountand redeemed at face value. For instance, a treasury bill may be issued at Rs. 6 and redeemed at its face value of Rs. 10. They are usually issues for short durations of time, often less than a year.

Dated Government Securities

These are long-term bonds with a time period of anywhere between 5-40 years. The interest rate on them can either be fixed or floating. They are further of several types including fixed-rate bonds, floating-rate bonds, inflation-indexed bonds, capital indeed bonds, and so on. Most retail investors who buy government bondspurchase from among these types of bonds.

Cash Management Bills

These are extremely short-term debt instruments with a term of up to 3 months issued by the Reserve Bank of India (RBI) to meet the government’s short-term liquidity requirements.

State Development Loans (SDLs)

While all the previous types of bonds are issued by the central government, SDLs are issued by state governments in India to meet their monetary needs.

Why Buy Government Bonds?

Retail investors buy government bonds for a number of reasons that include:


This is the single most important reason that retail investors prefer to buy government bonds. Since G-secs are backed by a sovereign guarantee, they are one of the safest instruments in the market, Even fixed deposits (FDs) do not offer the level of safety offered by G-secs.

Higher Interest Rates

Government bonds offer higher interest rates as compared to other comparable investment options such as FDs. For instance, as of May 2021, RBI’s floating rate bonds offer an interest rate of 7.15%, whereas SBI’s FD offers an interest rate of only 4.9%, making bonds a far better option.

Long Term Investments

At present, most FDs do not allow for investment tenures longer than 10 years. Some investors prefer options that offer longer term periods of up to 20 or even 30 years. For such investors, bonds are a good option.

No Upper Limit

Unlike many other investments that cap the upper limit, there is no upper limit on investment in government bonds. There is however a minimum limit of Rs. 1000.

How to Buy Government Bonds

You can buy government bonds through the following means:

Use the NSE goBID App

The NSE goBID app was launched in 2018 to allow retail investors to directly purchase T-Bills and G-secs. You need to first register on the NSE website before downloading the app. You can then proceed to buy government bonds online.

Buy from a Bank

Several bonds such as RBI floating rate bonds can be purchased from banks. Visit your nearest bank branch to find out more.

Use a Full-service Broker

Full-service brokers such as Angel One help investors buy government bonds, besides providing information and advice on the various types of bonds and which is best suited to their needs.

Taking the Mutual Fund Route

With so many advantages, investing in bonds should be simple and hassle-free, right? Unfortunately, it is not always so. Bond markets can be very complicated especially when one does not intend to hold the security till maturity. A big disadvantage of directly investing in bonds is the tax implications. Interest received on bonds is taxable. For people in high-income brackets, this can severely impact their returns. In such a case it makes more sense to invest in bonds through mutual funds such as gilt funds that are mutual funds that invest only in government securities. The main advantage of investing in gilt funds instead of directly purchasing a G-sec is that the returns on the gilt fund are taxed according to capital gains tax which presently stands at 20%. For a person in the high-income tax bracket of up to 30%, this means a tax break of up to 10%. Therefore, depending on your financial position and goals, you should take a call on whether to buy government bonds directly or to invest through mutual funds.

The Bottom Line

Government bonds are a great investment option for those looking for safety and longer tenures. However understanding the bond market can be complicated, and bonds come with higher tax implications especially for those who fall in the high-income bracket. For such people, it makes more sense to buy gilt funds that invest in G-secs rather than to buy government bonds directly. Depending on one’s position and objectives, one can take a call accordingly.