Which Should You Choose: Debt Mutual Funds or RBI Retail Direct?
Do you want to increase your money but need more stomach for market volatility? Don't panic.
Government securities are one of the most reliable investment options. They have the full faith and credit of the federal government behind them and pay out a predetermined interest rate (the "coupon") whenever they reach maturity.
You may diversify your portfolio by investing entirely in these fixed-income instruments or setting aside a certain amount.We, the average retail investor, have hitherto relied on debt mutual funds to get exposure to Government assets. Nonetheless, the government has made it possible to purchase and sell government assets directly via an online portal called RBI retail direct. Let's have a look at the differences between these two investing strategies.
What are Debit Mutual Funds
Debt mutual funds invest their investors' money in fixed-income instruments like corporate or government bonds. When investing in a gilt fund, you can expect Government securities to make up around 80% of your portfolio. Like other types of mutual funds, debt funds are managed by professionals for a fee known as the expense ratio. You may establish a SIP and invest regularly, or you can invest a flat payment.
The RBI retail direct is what?
The Government of India has developed a mechanism called RBI retail direct via which citizens may invest in Government securities without going through any middlemen. Treasury bills, Central Government Bonds, State Government Bonds, and Sovereign Gold Bonds are the four types of Government assets that may be purchased via this online platform.
Comparison of Debt Mutual Funds vs. RBI Direct Investment
The following criteria serve to distinguish between the two investment avenues:
- The very minimum required to start.
If you want to invest via RBI retail direct, the minimum amount you are needed to invest is Rs. 10,000. But, if you invest in mutual funds, you can select between making an initial lump sum amount or making payments on a regular basis via a systematic investment plan (SIP). The least amount required to participate in a SIP is merely Rs. 500.
- Phase of maturation
In most cases, a close-ended debt mutual fund will have a maturity term between three and five years. In addition, there are special category gilt funds with a lock-in duration of ten years for investors to commit their capital.
On the other hand, when you utilize the RBI retail direct site to make direct investments in government securities, the amount of time it will take for your money to mature fully is determined by the kind of asset that you are purchasing. This may be as short as 91 days (in the case of T-bills) or as long as over a year in other cases.
- Investment price
But, with RBI retail direct, you won't have to pay any investment fees since there is no intermediary. One of the main advantages of this system is this.
- Liability for Taxes
Interest on government bonds is often paid semiannually or annually. These gains are subject to taxation at your normal rate. Investing using the RBI retail direct platform will result in annual taxation of interest income. Let's say you're in the 30% tax band and put Rs. 1,000,000 in government security which returns 6.5% annually. Your interest income of Rs. 6,500 is subject to taxation at a rate of 30 percent.
Nevertheless, the tax implications of investing in a debt fund are conditional on the duration of your holdings in the fund. Gains from a mutual fund held for over three years are subject to long-term capital gains tax (LTCG) at a fixed rate of 20%, plus indexation benefit. Your tax bill will be drastically lowered as a result of this. If you keep the mutual fund for less than three years, you will be subject to STCG taxation at your marginal tax rate.
While investing in a debt fund, you have more liquidity since you can sell your shares quickly. This is because Government assets are constantly bought and sold by a huge market of institutional purchasers. Retail investors cannot participate in this market, though.Using the RBI retail direct platform, you must source potential purchasers of your securities. Government securities are rarely traded on the open market; therefore, selling them might be challenging. The investment might decrease in value, causing you to sell it at a loss. In addition, this is severe damage to your cash flow.
Which one to choose? (Conclusion)
If you need more experience in the financial world, it is best to seek the advice of experts. When you invest in a debt fund, the fund manager manages your portfolio and liquidity needs, while direct investing does neither.
Those in a high tax bracket who plan to retain their investment for more than three years might benefit from investing in debt mutual funds. Instead, you may invest via the RBI retail direct option, which offers you the same short-term tax treatment at a lower overall cost.
Investing in government bonds is risk-free, and the rewards are reliable. Yet, such investments often face interest rate risk and liquidity risk. When deciding between debt mutual funds and RBI retail direct, it is important to do some market research and determine the length of time you want to keep your money invested.