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Gilt funds vs fixed deposits: Where to invest?

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With the RBI Retail Direct Scheme investors now have more flexibility while investing in gilts. Now, the question is, does this make gilts more attractive than fixed deposits?

Gilt funds vs fixed deposits: Where to invest?
The Reserve Bank of India (RBI) recently launched a scheme for retail investment in government securities called 'RBI Retail Direct'. The scheme aims at greater retail participation in gilts. Before this move, retail investors could participate in the gilts through a debt mutual fund which required three years of holding to qualify for 20 percent capital gains with indexation benefit.
Through the 'RBI Retail Direct Scheme', investors now have more flexibility while investing in gilts. Now, the question is, does this make gilts more attractive than fixed deposits?
Well, like bank fixed deposits, gilts are not tax-free. Interest received on them is fully taxable. However, gilts are considered risk-free since they are backed by the government and offer a slightly better return than bank fixed deposits, Abhinav Angirish, Founder at Investonline.in told CNBC-TV18.
“Since the returns on the gilt as well fixed deposit is determined by interest rates, the investor needs to be aware of the interest rate scenario. Investment in gilts requires a minimum investment of Rs 10,000 whereas a fixed deposit can be opened with Rs 5,000. A debt mutual fund offers an opportunity for higher returns since it also invests in highly rated bonds of the companies which offer higher returns,” Angirish said.
Additionally, it's vital to note that investors earn interest through the coupon rate regularly when investing through RBI’s gilt scheme, just like fixed deposits. However, there is a potential for investors to have capital appreciation if interest rates reduce provided there is adequate demand for the bond which is maturity specific. This is not possible in fixed deposits, said Anup Bansal, Chief Investment Officer at Scripbox while speaking to CNBC-TV18.
The tax treatment on the long-term capital gains, if held for more than 3 years, is 20 percent with indexation benefit, he added.
Further, Bansal suggested investors to look at RBI’s gilt scheme with different maturities based on the liquidity requirements.
"Though the secondary sale of the securities is allowed through RBI’s portal, the demand and accordingly liquidity will be determined as the system evolves. At this time, the decision to invest in these securities should be based on the interest rate and the maturity that matches customers' liquidity requirements. As such, there is no credit risk in RBI’s gilt scheme. Though there is default risk in fixed deposits, historically investors have never lost capital," Bansal said.
When comparing with fixed deposits, here are the latest yields for different maturity durations of gilts:
YearYear Of MaturityFD Rate (%) Gov Bonds Yield (%)
1 Year20224.43.55
2 Year202355.03
3 Year20245.14.75
5 Year20265.35.75
10 Year20315.46.35
(Source: Scripbox)
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