Debt Mutual Funds vs RBI Retail Direct – Which One to Go for?

Are you looking to grow your wealth but do not have the risk appetite to endure the market fluctuations? Worry not. 

You can always choose Government securities, which are one of the safest ways to generate returns. They are backed by the Government and offer a fixed return – or coupon amount – on maturity. 

While you may choose to exclusively put your funds in these fixed-income securities, you may also reserve a portion for this to diversify your portfolio.

Until now, retail investors like us could only invest in Government securities through debt mutual funds. But the Government has introduced RBI retail direct, an online platform through which you can directly buy and sell Government securities. Let us see what the features of these two modes of investment are. 

Debt mutual funds

When you invest in a debt mutual fund scheme, your money is put in fixed income securities such as company bonds and Government securities. If you opt for a gilt fund, about 80% of your portfolio will include Government securities. Like any other mutual fund, a debt fund is managed by experts for which they charge a fee called the expense ratio. You can choose to invest your money in a lump sum or pay monthly installments by starting a SIP. 

Let us now see how the RBI retail direct platform helps you invest. 

What is RBI retail direct?

RBI retail direct is a platform launched by the Government of India that allows you to directly invest in Government securities instead of taking the route involving intermediaries. You can access this platform online and invest in four categories of Government securities, namely, Treasury bills, Central Government bonds, State Government Bonds, and Sovereign Gold Bonds. 

Now that you know what the two modes of investment are, let us see how they differ. 

Debt mutual funds vs RBI retail direct: Difference

You can differentiate between the two channels of investing on the following basis:

Minimum initial investment 

If you invest via RBI retail direct, you are required to invest a minimum of Rs. 10,000. However, with mutual funds, you get the flexibility to choose between investing a lump sum amount in the beginning or making monthly payments through a SIP. For a SIP, the minimum instalment amount is just Rs. 500. 

Maturity period 

The maturity period of a close-ended debt mutual fund usually ranges between 3 and 5 years. Moreover, there are special category gilt funds that come with a lock-in period of 10 years. On the other hand, because you directly invest in the Government security using the RBI retail direct portal, the maturity period of your investment depends on the security that you are buying. This can range from 91 days (as in the case of T-bills) or even over a year. 

Investing cost

When investing through mutual funds, you have to pay a management fee, known as the expense ratio. The maximum fee that a mutual fund company can charge is capped at 2% of your investment amount. However, the expense ratio is much lower in the case of gilt funds, coming down to about 0.3%-0.6%. For instance, if you invest Rs. 1,00,000 in Government securities through a mutual fund that has a 0.3% expense ratio, the amount of fee charged will be Rs. 300. 

On the other hand, since no intermediary is involved in the case of RBI retail direct, you don’t incur any investing cost. This is a major benefit of this platform. 

Tax applicability 

Government securities pay interest on a half-yearly or yearly basis. These returns are taxable as per your income tax slab. If you choose to invest through the RBI retail direct platform, you will have to pay tax on the interest income every year. For instance, you invest Rs. 1,00,000 in a Government security that pays 6.5% interest annually, and you fall in the 30% tax bracket. You will have to pay 30% tax on your interest income of Rs. 6,500. 

However, in the case of a debt fund, the taxation depends upon the period for which you stay invested. If you hold the mutual fund for over 3 years, LTCG is applicable on the gains at a flat rate of 20%, along with indexation benefit. This significantly reduces your tax liability. However, if you hold the mutual fund for less than 3 years, STCG is applicable, and you are taxed as per your income tax slab.

Liquidity 

Investing through a debt fund makes it easier for you to exit the investment, thus providing greater liquidity. This is because a vast market of institutional buyers regularly buys and sells Government securities. However, this market is not accessible to retail investors.

When investing through the RBI retail direct platform, you are responsible for finding buyers who are willing to buy the securities from you. Since Government securities are not widely traded in the retail market, it may be difficult for you to exit the investment due to a lack of buyers. You may be forced to sell the investment at a lower cost and incur a loss. This also is a major blow to your liquidity.  

This is how the two modes of investing in Government securities differ. Let us now see what the best way to invest for you is. 

What is right for you?

If you are new to the investment field, prefer taking the assistance of professionals. Fund managers help you maintain your portfolio and liquidity when you put your money in a debt fund, while this is not an option when you invest directly. 

Moreover, from a taxation point of view, investing through debt mutual funds is beneficial for those who fall within a high tax slab and intend to hold their investment for over 3 years. Otherwise, you can choose to invest via the RBI retail direct option, which is taxed the same way in the short term, saving on investment costs. 

Summary

Government securities are a safe investment and come with stable returns. However, interest rate risk and liquidity risk are common in such an investment. Study the market and decide for how long you plan to stay invested before choosing between debt mutual funds and RBI retail direct.