Debt Mutual Fund Vs RBI Retail Direct: Which Is Better

Last Updated: 4 May 2024

A key aspect of financial planning is investing. There are several options and avenues available in the market. A tested and traditional method of investing is via Debt Mutual Funds. These acted as intermediates. With the Government of India’s introduction of the RBI Retail Direct platform, investors can now buy government securities directly. It has eliminated the need for any middle platform. With these two prominent choices available, many investors find it difficult to select the one that is best for them. This article aims to thus illustrate the key features of both to help you make a proper decision. 

An Overview of Both

Before going into the details of Debt fund vs RBI Retail Direct Fund, it is essential to have a proper understanding of both.

Debt Mutual Fund
A Debt Mutual Fund can be classified as a type of mutual fund plan that invests in capital appreciation-producing fixed-earning tools. These include government bonds, corporate bonds, money market tools, and corporate securities. Bond funds and income funds are other names for Debt Mutual Funds.

RBI Retail Direct 
The Reserve Bank of India’s revolutionary RBI Retail Direct Scheme gives retail investors direct access to government assets. It provides convenience, competitive interest rates, and safety.

Debt Fund vs RBI Retail Direct Fund: Options

You can open a Retail Direct Gilt account with RBI under the RBI Retail Direct Scheme and use that account to access the RBI Retail Direct Portal. Also, you can invest in a direct way in four different kinds of government securities using this platform. This includes

• Treasury Bills (T-Bills): The Indian government issues short-term debt instruments known as Treasury bills, or T-bills, and borrows money for a short time using these instruments. The government currently issues T-Bills in three tenors: 91 days, 182 days, and 364 days.
• State government bonds: These are long-term debts where the State governments borrow money for a year or longer. State governments do not issue T-Bills, so they issue bonds that have a maturity of one year or sooner.
• Central government bonds: The Government of India issues Central government bonds, which are long-term financial securities. The Indian government can borrow money for up to a year through these bonds.
• Sovereign Gold Bonds (SGBs): Government securities known as SGBs are valued in gold grams. They serve as an alternative to actually possessing gold.

You can also invest in G-secs via Debt Mutual Funds. Certain types of mutual fund schemes focus primarily on investing in government securities. The fund management will place at least 80% of your money in government securities in either of these kinds of debt mutual funds. The two types are:

• Gilt Fund: Gilt funds only invest in highly rated government securities with extremely minimal credit risk. The government rarely defaults on the loans it receives as debt instruments, making gilt funds a great option for fixed-income investors who are risk averse.
• Gilt Fund With 10-Year Constant Duration: It is a Gild Fund with a 10-year duration. 

Debt Fund vs RBI Retail Direct Fund: Cost

Using RBI Retail Direct eliminates the need for an intermediary when purchasing government securities. Since you deal with the Reserve Bank of India directly instead, this technique does not incur transaction costs. 

However, investing your money in G-secs will come with a cost (Expense Ratio) from the Mutual Fund provider. A Debt Mutual Fund may charge an Expense Ratio of up to 2% of the entire investments, per SEBI regulations. At present, Gilt Funds have expense ratios of 0.3 to 0.6%.

Debt Fund vs RBI Retail Direct Fund: Tax Rules

Interest on government securities is paid either annually or half-yearly. Your income tax tariff determines the tax on these returns. If you decide to invest in the RBI Retail Direct platform, annual tax on interest income will have to be paid. For example, let’s say you invest one lakh rupees in G-sec that yields 6.5% of interest per year and is subject to 30% tax. 30% tax will be deducted from your ₹ 6,500 interest income. 

On the other hand, if you invest in government bonds through Debt Mutual Funds and retain them for an extended period, you may benefit from certain tax advantages. In addition to indexation benefits, long-term capital acquisition is applied to gains on mutual funds kept for a period longer than three years at a fixed 20% rate. This substantially lowers the amount of taxes due. Conversely, short-term acquisitions are relevant, and the investor pays tax according to their income tax tariff if they have held the mutual fund for a period below three years. 

Debt Fund vs RBI Retail Direct Fund: Maturity

The maturity period of your investment depends on the asset you are purchasing because you use the RBI retail direct site to invest directly in government securities. This can be anything from ninety-one days (as with T-bills) to more than a year. 

Conversely, a close-ended debt mutual fund typically has three to five years of maturity. Additionally, certain gilt funds fall under a specific category and have a 10-year lock-in duration. 

Debt Fund vs RBI Retail Direct Fund: Making the Right Choice

Choosing between a Debt Mutual Fund and an RBI Retail Direct Fund depends on your personal investment goal, risk assessment, and similar factors. If you’re new to investing, seek professional advice. When you invest in a Debt Mutual Fund, fund managers assist you in maintaining the investment portfolio and liquidity; when you invest directly, this assistance is not needed

Additionally, investing in Debt Mutual Funds can be advantageous from a tax perspective for people in a higher tax bracket who plan to keep their money for more than three years. Alternatively, you can invest through the Rbi Retail Direct option. This saves money on investment charges because the tax is imposed in a manner similar to the short-term. 

Investing directly in T-Bills or government bonds for one to three years can be a wise choice if you’re searching for safe investment opportunities for your short-term objectives. However, there are additional challenges associated with investing directly in G-secs. Although there is not much credit risk associated with G-secs, there is interest rate risk and liquidity risk. Because of this, navigating the government securities market can be challenging, particularly if you plan to invest in the secondary market rather than keep the bonds until they mature.

Conclusion

Government securities offer steady returns and are a safe place to invest. Nonetheless, interest, tax, and liquidity possibilities are typical of this kind of investment. Evaluating the market is important to determine your investment horizon. Considering the above mentioned factors can help you make an informed decision among Debt Mutual Funds and RBI Retail Direct.

Frequently Asked Questions

What is the minimum investment for an RBI Retail Direct?

The minimum investment required for the RBY Retail Direct is ₹ 10,000.

What is the liquidity element of Debt Funds?

Investing through a debt fund increases liquidity by making it more straightforward to exit the investment. This is because government assets are regularly bought and sold by a sizable market of institutional buyers. Retail investors, however, cannot access this market.

Can G-secs be sold back to the Government?

These G-secs cannot be sold back to the government. It would be best to locate other retail investors who are prepared to purchase your securities on the RBI Retail platform. In short, you must identify secondary market purchasers for your securities.

What is the minimum investment required for a Debt Fund?

Debt mutual funds allow investors to invest a one-time lump sum or recurring monthly payments under a systematic investment plan. The minimum installment amount for a SIP is a mere ₹ 500.

What is RBI Retail Direct?

The Government of India introduced RBI Retail Direct, a portal that lets you buy government assets directly without going through intermediaries.