How to buy bonds

For most of Indian financial history an individual could not conveniently own a government bond. You owned them through a fund, or through a bank, or not at all. That changed, and the change is underused.

RBI Retail Direct

The Reserve Bank describes the scheme as "a one-stop solution to facilitate investment in Government Securities by individual investors". You open a Retail Direct Gilt (RDG) account directly with the RBI.

Three features are worth stating plainly, because each one removes something that used to stand in the way.

It is free. RBI: the account is "completely free of charge and does not involve any intermediary". The FAQ is explicit about the point of that — it reduces the charges an individual would otherwise pay "for investing through aggregators or taking indirect exposure through mutual funds".

There is no middle layer. The securities are held in an account in your name at the central bank. No distributor, no fund, nobody's expense ratio.

Individuals only. Only natural persons may open an RDG account. You need a rupee savings bank account in India, a PAN, and an officially valid KYC document.

Non-competitive bidding, and why it suits you

Government securities are sold at auction, and the scheme "is designed to facilitate only Non-competitive participation (i.e., bids without choosing your own price)".

That sounds like a limitation and is closer to a protection. In a competitive bid you name a yield, and if you name it wrong you either get nothing or overpay. In a non-competitive bid you say how much you want and accept the price the auction settles at — the weighted average that the large professional bidders established.

So a retail buyer gets the institutional price without having to form a view on where the auction will clear. Given that the institutions in that auction price government bonds for a living, taking their average is a sensible thing to be obliged to do.

RBI's definition of a retail investor for this scheme is broad: "any person, including individuals, firms, companies, corporate bodies, institutions, provident funds, trusts."

The other routes

The stock exchanges. Government securities and corporate bonds are listed and can be bought through a broker with an ordinary demat account. Convenient if you already have one. Watch two things: the quantity available at a sensible price can be thin, and the spread on a lightly traded bond can exceed a year of the extra yield you were buying it for. Chapter 7 of the markets subject prices that.

Debt mutual funds. Someone else selects, diversifies and manages maturity, and you get daily liquidity. You pay an expense ratio every year for it. Chapter 8 is about when that is a fair trade.

Bank fixed deposits. Not a bond — a deposit, with no price that moves, and that is the real difference. A deposit has no market value to fall when rates rise; it also cannot rise when rates fall, and breaking it early usually costs a penalty rather than a market price.

Small savings schemes. PPF, NSC, Senior Citizens' Savings Scheme and the rest are government-backed fixed income with their own rules and tax treatment. They belong in the same part of a portfolio as bonds and are not covered chapter by chapter here.

Choosing between direct and a fund

The honest comparison, with the trade-off stated rather than resolved.

Direct suits you when you know roughly when you need the money, so you can buy a maturity that matches it and hold. Then the price swing of chapter 3 never touches you, you pay nothing in annual charges, and the return you were quoted is the return you get.

A fund suits you when you want to decide later, want someone else managing credit and maturity, or want to hold corporate bonds — where selection genuinely matters and buying three bonds directly is not diversification.

The thing that should not drive the decision is which quoted a higher number. A gilt fund's recent return is a historical fact about a period when rates moved; a bond's yield to maturity is a forward statement about what you will earn if you hold it. Chapter 5 is why those are not comparable.

The point

An individual can open a Retail Direct Gilt account with the RBI, free and with no intermediary, and buy government securities through non-competitive bidding at the price the professionals set. Exchanges, debt funds and deposits are the alternatives — and holding a bond whose maturity matches your need is what makes the direct route work.