Hold-to-maturity investors may choose G-Secs with matching horizon

Those who may need liquidity before end of tenor should avoid them

Yields of central and state government bonds have risen, widening the gap with fixed deposits (FDs) of large banks. The 10-year government security (G-Sec) yield is at 6.60 per cent, while state development loans of the same tenor are at 7.09 per cent. In comparison, State Bank of India is offering 6.05 per cent and HDFC Bank 6.15 per cent on FDs of five to 10 years.

 

Right time to enter? 

Experts see this as a favourable entry point. “This presents a timely opportunity for retail investors to secure sovereign-backed returns that exceed those of comparable FDs,” says Saurav Ghosh, co-founder, Jiraaf.

 

Investors should avoid long-duration bonds for now as yields might increase. “They should instead focus on medium-term maturities, which strike a better balance between yield and risk,” says Raghvendra Nath, managing director, Ladderup Asset Managers.

 

Free of default risk 

G-Secs are sovereign-backed and free of default risk. Investors can exit them at any time. “FDs usually impose penalties for premature withdrawal,” says Ghosh.

 

G-Secs can also serve as margin money for traders. “G-Secs can double up as collateral while still earning interest,” says Vijay Kuppa, director, Bidd.

 

Direct investing also offers control over the choice of bonds. “There is also no cost since there are no fund management fees,” says Nath. 

 

Watch out for interest-rate risk 

The key risk is interest-rate volatility. “Interest-rate movements affect the price of these investments,” says Vishal Goenka, co-founder, IndiaBonds.com.

 

Suppose you buy a 10-year bond at 7 per cent yield, which later rises to 8 per cent. The price will fall: a 1 percentage point rise in yield would cause a 6–7 per cent drop in price. An investor who has invested about Rs 1 lakh could lose Rs 6,000–7,000 if he needs to exit at that point.

 

Risk-averse investors should consider shorter-tenor G-Secs. “These are less volatile and you are less likely to face price shocks if you need to exit before maturity,” says Kuppa.

 

Liquidity is another concern. Retail investors may not always find quick exits. “Certain bonds may be harder to sell and may have wide bid–ask spreads,” says Alekh Yadav, head of investment products, Sanctum Wealth.

 

Interest from G-Secs is taxed at the slab rate. Nath adds that investors must reinvest payouts manually if they want compounding.

 

Who should consider G-Secs? 

G-Secs work for those seeking safety and predictability. “Those building a conservative allocation or looking for better-than-FD, sovereign-backed returns may go for them,” says Kuppa.

 

According to Yadav, they are best suited for buy-and-hold investors.

 

He adds that those needing frequent liquidity or higher returns should avoid long-dated G-Secs. He suggests matching maturity with investment horizon.

 

Investors who take the online bond platform route instead of RBI Retail Direct must ensure they are Sebi-registered.

 

Should you consider gilt MFs? 

Gilt funds offer convenience. They are also a more liquid option that allows investors to redeem anytime at net asset value.

 

“Unlike direct investing in G-Secs, where the interest payouts are taxed at the regular income tax rate, in mutual funds investors are taxed only when they redeem their units,” says Nath.

 

Investors, however, pay an expense ratio in gilt MFs and cannot select the bonds they hold (the fund manager decides which ones to hold).

 

Advice in today’s interest-rate scenario 

The RBI has cut rates by 100 basis points, and inflation has cooled, but long-term yields remain high due to borrowing pressures. While bond yields look attractive, especially in the medium- to long-term segment (five to 10 years), prices are currently under pressure. “For investors planning to hold bonds to maturity, investing directly via the RBI Retail Direct platform offers safety and decent returns,” says Nath.

 

He adds that gilt funds may appeal to those seeking liquidity and possible gains if rates fall further.

 

A downward interest-rate cycle offers the possibility of capital gains. “But most of the potential benefits from holding longer-duration assets have likely already been realised. The RBI may at best lower rates by 25–50 basis points more in this cycle,” says Yadav. According to him, investors should consider not increasing duration exposure in their portfolios and may even book profits if they already hold duration assets.

 

Nath suggests a balanced strategy, which combines direct G-Secs (for hold-to-maturity investments) with gilt funds (for long-term investing and potential capital gains).

 

Consider corporate bonds 

G-Sec yields serve as benchmarks for corporate bonds. “Corporate bond issuances are offering spreads of 100–200 basis points above gilts. Retail investors can explore investment-grade corporate bonds that are offering attractive post-tax yields,” says Ghosh. According to him, bonds with tenors of two to five years offer meaningful yield premiums over G-Secs.

 

These bonds, however, may carry credit and interest-rate risk, whose quantum would depend on their rating and tenor, respectively.