Stock Market

How to Invest in Government Bonds?

Created on 01 Sep 2021

Wraps up in 6 Min

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Stock market entices pretty much every individual on this planet, and why shouldn’t it? After all, it offers far better returns than any other investment avenue in the regulated markets. However, not many people have a heart of steel to deal with the vigorous palpitations that it sets out due to fluctuations in share prices. So, is there any other option that we can tap on?

Of course! There is always a choice in financial markets, all you gotta do is to be aware of them, and as you already know, we are always up for it.

Therefore, in today’s blog, we’ll be discussing some other options that we can tap on. Let’s get started.

What are Government Bonds?

All of us are aware of the act of borrowing and lending money, be it lending or borrowing from a friend or a bank. But what if we told you that you could lend money to the government as well.

Yes, you heard it right! It is possible. Like everyone else, even our government also needs money to ensure the smooth functioning of the economy. Therefore, they came up with this concept of Government Bonds, which in simple words, is a loan that you provide to the government where you have a guarantee from the sovereign that it will pay the money back to you along with regular interest payments throughout the tenure of the validity of the bond.

Now that you know what government bonds are, let’s see how we can invest in this avenue that is out of harm’s way and whether it has some limitations.

Methods to invest in Government Bonds.

  1. Gilt Funds

Gilt Fund is a type of debt mutual fund which invests only in government securities issued by the Reserve Bank of India (RBI) on their behalf. They invest in debt securities issued from both state and central government. Unlike other routes, institutional investors heavily dominate, it is also a retail-friendly way of investing in government bonds.

Major advantages of investing through the Gilt fund are that it anticipates interest rate movements in the market, safeguards capital has practically no credit risk as the chances of the government going out of business is zero. Not only that, these bonds have the potential of generating reasonable returns as well.

As it is a debt mutual fund, there has to be a tax component. So for Gilt funds, which are held for less than 36 months, they are taxed on short term capital gain basis, according to the income slab of the investor while on the other hand, if it is held for more than 36 months, an investor is liable to pay 20% tax with indexation benefits. 

  1. Sovereign Gold Bonds (SGBs)

If you are a gold enthusiast and want to invest in gold at the least possible price and with a guaranty of safety and purity from the government, then there is no better option than Sovereign Gold Bonds, where the bonds go in a lock-in period of 8 years with an option to redeem from 5th year into the investment. It also carries an interest rate of 2.5% p.a.

For retail investors, the minimum and maximum amount that you have to and can subscribe for is pegged at 1 gm and 4kgs, respectively. Moreover, you can use these bonds as collateral while applying for loans. 

  1. Conservative Mutual Funds

Conservative mutual funds predominantly invest in securities that a state or central government backs along with other debt, money market instruments, and equity and equity-related securities, which eventually makes it an ideal option for investors with a low-risk profile. It also ensures capital protection and capital appreciation by taking leverage of its diversified portfolio. The taxation is similar to the Gilt Mutual Funds. 

  1. Liquid Funds

Liquid funds fall under the category of debt mutual funds, which invest in financial instruments like Treasury bills which are government securities with a maturity of 91 days, and in commercial papers. These funds have a significant benefit as there is no lock-in period, and an investor can withdraw any amount without being charged any entry or exit loads.

These funds usually offer returns between 7% to 9%. Liquid funds are taxed according to other debt securities with short-term gains (Holding period < 36 months) being taxed according to income slab, long term gains (Holding period >36 months) being taxed at 20% with indexation benefit. Dividends are taxed at the individual’s applicable slab rate.

  1. NSE goBID (Government Bond Investment Destination)

Another option that bond investors have at their discretion is  NSE goBID, where an investor can directly log in to NSE goBID’s website or mobile application and can invest in government bonds of their choice by bidding for the same. A point to note is that this option is only available to resident investors.

  1. Retail Direct Gilt Account (RDG)

This new facility introduced by the RBI will allow retail investors to access government securities in retail lot sizes. According to a circular on details of the scheme issued by RBI, retail investors will have to open and maintain a Retail Direct Gilt Account (RDG) on the central banks portal by using an OTP sent to their mobile number or email.

As prerequisites for doing so, an investor must have a savings account with a bank in India and valid identity proof as demanded. After opening an account, retail investors can go for investing under a reserved section of ‘non-competitive bidding’ where they can bid without specifying a price, but what one needs to consider is that the competitive bidding will set the price of allotment among institutional investors.

The minimum amount of investment has been set at 10,000 rupees, and the RBI has allowed the investors to access its Negotiated Dealing System (NDS)- Order Matching (OM), where an individual can transact in bonds worth less than 5 crore rupees in the portal's exclusive ‘Odd lot’ segment.

Why do these methods fail to entice investors?

By now, reading about various means of investing in govt-bonds must have given you a fair idea about the benefits of government bonds. But, as a matter of fact, debt securities, in general, have never been an attractive option to retail investors, and if we align our thoughts with the current environment of money market instruments, they will never be an enticing investment avenue. But why is that so? Let’s look into the rationale. 

  1. Returns

If you are lured by the richness of government backing in various G-secs, then you should probably look at the option of a small savings scheme that is identical to the G-secs when it comes to the security of your invested amount along with a little variance in the characteristics. But let’s have a look at how these two investment avenues compare with each other.

Government Securities


Small Savings Schemes


10-year bond


Post Office Deposits 

5.5% (3 years )

6.7% (5 years)

5-year bond


National Savings Certificates


3-year bond


Kisan Vikas Patra

6.9%(10 years)

And you know what's more ironic than this? Even the bonds that RBI issues have a return of more than 7%. Isn’t the hilariously self-contradictory! 

  1. Tax-free bonds

A major competitor to this segment of bonds is the availability of tax-free bonds issued by government-backed entities such as National Thermal Power Corporation (NTPC), National Highways Authority of India (NHAI), and Housing and Urban Development Corporation, and many more. Furthermore, the interest on these bonds is entirely tax exempt as TDS is not applicable to them.

  1. Inflation

A major disadvantage with these fixed coupon government securities is the threat of reduction in purchasing power. A major portion of its G-secs returns are canceled out by the increase in inflation rates which brings down the real rate of return from these securities.


It’s good to have bonds in your portfolio as they are a defensive asset class. They are typically less volatile than equities in addition to their ability to act as a source of diversification and reducer of portfolio risk.

Speaking of the new announcement, every new initiative will always be a welcoming move for some and unwelcoming for others. What you have to do is to see if it aligns with your investment objectives, in view of the fact that there is always the availability of an attractive alternate option that might be trying hard to entice you with a plethora of perks. Still, you need to hold your fort strong and tall.

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Prabudh Mishra

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Prabudh Mishra is a finance and behavioral economics enthusiast. He has a sense of purpose to eliminate irrationality in human behavior while they make the most crucial financial decisions in their life.

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