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Mutual Funds vs Government Bonds: Which One to Choose?

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Created on
August 12, 2022


What’s Inside

What are government bonds?

G-sec or government securities are short-term (T-Bills with a maturity of less than 1 year) or long-term (government bonds/dated securities with a maturity of more than 1 year) securities issued by the Indian central or state governments to borrow from the financial market.

Retail investors can invest in G-Secs through various channels, including primary dealers, banks, stock exchanges, mutual funds, and depository participants. The RBI's new scheme, RBI Retail Direct, allows retail investors to directly invest in G-Secs via an online portal, diversifying the investor base and increasing their participation in the G-Sec market.

Ways to invest in government bonds

RBI Retail Direct

If you're interested in investing in G-Secs, you may want to consider RBI Retail Direct. It's a convenient option for retail investors and offers the following features:

  • Open to all resident individuals, including minors and HUFs.
  • Allows you to open and maintain a GSA with RBI to buy and sell G-Secs online.
  • Offers a wide range of G-Secs, including treasury bills, dated securities, state development loans, sovereign gold bonds, and inflation-indexed bonds.
  • Provides competitive pricing and transparent market information.
  • Doesn't charge any fees or commissions for opening and maintaining the GSA or for transactions in G-Secs.
  • Enables you to receive interest payments and maturity proceeds directly in your bank account linked to the GSA.

Pros and Cons of investing in Government Bonds

Pros of investing in G-Sec

Cons of investing in G-Sec

They are extremely low risk as they are backed by the sovereign guarantee of the government.

They are subject to interest rate risk, which means their prices may fall when interest rates rise and vice versa.

They offer regular and assured income through coupon payments.

They may have lower returns than other fixed income instruments such as corporate bonds or debentures.

They have a wide range of tenors and yields to suit different investment needs and preferences.

They may have higher transaction costs and lower transparency than other marketable securities.

They are highly liquid and can be easily bought and sold in the secondary market.

They are not always the best choice, especially in a bull market


Difference Between Bonds and Mutual Funds

The table below highlights the parameters across which mutual funds differ from bonds.

Area of Consideration


Mutual Funds


Bonds are usually held for the long-term i.e., for a period that exceeds 5 years.

Mutual fund units can be held for the short-term as well as the long-term.


The principal amount, as well as the interest, applicable to bonds is fixed.

Interest rates applicable aren’t fixed. Instead, dividends are high in instances of the market performing well.


Investors receive fixed returns and don’t incur losses unless the bond issuer defaults on their payment.

Although investors may incur losses, they are likely to be minimal.


The purchase of bonds doesn’t imply ownership of a company or government.

Investors are provided with units of a mutual fund scheme but don’t own a stake.


Bond returns are fixed, and the risks involved are relatively minimal.

Mutual funds can provide you with high returns as well as modest returns. In the case of schemes that provide high returns, the risks involved are greater, whereas those that offer lower returns have considerably fewer risks.


Mutual funds can provide you with high returns as well as modest returns. In the case of schemes that provide high returns, the risks involved are greater, whereas those that offer lower returns have considerably fewer risks.


Investing in government bonds can be an attractive option for those seeking a low-risk, regular income stream. With RBI Retail Direct, retail investors have greater access to the G-Sec market. Government bonds offer the benefit of a sovereign guarantee and high liquidity. It is important to consider potential risks associated with interest rate fluctuations and transaction costs when investing in government bonds. Additionally, investors should be aware of the differences between bonds and mutual funds, as well as alternative investment options. With careful consideration and thoughtful research, government bonds can be a valuable addition to an investment portfolio.

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Frequently Asked Questions:

What type of investment has the highest return?

The following investments provide some of the highest returns (not necessarily in that order).

  • ELSS
  • Stocks
  • Corporate bonds
  • Dividend stocks
  • Money market accounts
  • Municipal bonds
  • Treasury bonds

What is better than bonds?

A few alternatives to bonds include the following.

  • Dividend stocks
  • Fixed annuities
  • High-yield savings accounts
  • Preferred stocks
  • Real estate crowdfunding companies
  • Real estate debt
  • Real estate investment trusts (REITs)
  • Worthy bonds

Are bonds safe if the market crashes?

Bonds remain a safe haven even if the markets crash.

What is the difference between a bond, stock, and a mutual fund?

When looking at a mutual fund vs stock vs bond comparison, you should note that while stocks provide percentage ownership to a company, bonds and mutual funds do not. Further, the returns drawn from each of these securities differ. While the safest returns are drawn from bonds, stocks offer the highest returns, and mutual funds provide investors with more moderate returns.


Investment and securities are subject to market risks. Please read all the related documents carefully before investing. The contents of this article are for informational purposes only, and not to be taken as a recommendation to buy or sell securities, mutual funds, or any other financial products.
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