Retail investors chasing yield in the government bond market are increasingly looking beyond the benchmark 10-year G-sec. The reason is simple: Longer-dated sovereign bonds are offering meaningfully higher yields.

Thanks to RBI Retail Direct and online bond platforms, small investors can now easily buy Central government securities (G-secs) and State Development Loans (SDLs or SGSs) across maturities, both in primary auctions and the secondary market.

The attraction is clear. The benchmark 10-year G-sec, 6.94 per cent GS 2036, traded at a weighted average yield of 6.87 per cent on August 21, according to CCIL data. In comparison, 30-year G-secs were trading at around 7.47 per cent. In other words, investors were getting a yield pick-up of about 60 basis points for extending maturity from 10 to 30 years. At times, the gap can widen to around 1 percentage point. Long-term SDLs also offer attractive yields, with 20- and 30-year SDLs trading at around 7.6 per cent during the day.

At first glance, the proposition looks compelling. Investors get sovereign-backed securities, regular semi-annual coupon payments and yields that compare favourably with several other fixed-income options. For someone with a genuinely long investment horizon, locking in a yield above 7 per cent can appear attractive.

But before extending maturity in search of a few extra basis points, investors need to ask a more important question: Does the additional yield adequately compensate for the higher interest-rate and price risk that comes with a 20- or 30-year bond?

Understanding long-term G-secs and SDLs

The RBI issues Central government dated securities on behalf of the Union government, while SDLs are issued for State governments. G-Secs are available across a wide range of maturities, extending up to 50 years. Interest is generally paid half-yearly. For resident investors, interest income is taxable at the applicable slab rate, and TDS is not deducted.

SDLs typically offer a modest yield premium over comparable G-secs, compensating investors for the additional perceived risk. Both are high-quality fixed-income instruments, although Central government securities generally command the lowest yields because of their stronger sovereign status and deeper liquidity.

For retail investors, the decision should, therefore, depend not just on the yield, but also on the investment horizon and liquidity.

Pros

Sovereign backing: Both G-secs and SDLs carry negligible credit risk, as they are obligations of the Central government and the respective State governments, respectively. For conservative investors, this can provide capital security and predictable coupon income without taking the credit risk associated with corporate bonds.

Higher yield for longer maturity: The biggest attraction is the yield pick-up. Long-term G-secs and SDLs generally offer higher yields than 10-year G-secs as investors are compensated for taking greater duration risk. For an investor who can hold until maturity, this can be useful. The investor can lock in the prevailing yield and receive a predictable stream of coupon payments over a long period. This can be particularly relevant for investors with long-term income requirements such as retirees.

Potential for capital gains: Long-duration bonds can also benefit disproportionately when interest rates decline. A fall in market yields results in a rise in bond prices, with the price movement generally larger for longer-duration securities.

This creates an additional return opportunity for investors who buy long-term bonds when yields are elevated and rates subsequently fall. However, this is not a free return. It comes with equally significant downside when yields move in the opposite direction.

Cons

Higher yield can come with higher price risk: Unlike a bank deposit, the market value of a 20- or 30-year G-Sec can fluctuate sharply with changes in interest rates. When yields rise, bond prices fall and the impact is greater for longer-duration securities. Thus, an investor can face a substantial mark-to-market loss even when the government continues to pay every coupon on time. Investors who buy long-term bonds with the intention of selling before maturity should, therefore, be prepared for significant price volatility.

For retail investors without a strong view on interest rates, long-duration G-Secs are better approached as hold-to-maturity income instruments rather than trading bets.

Higher yield can become a trap if rates rise: Locking into a long-term bond at today’s yield carries opportunity cost. If interest rates rise later, newly-issued G-Secs and other fixed-income instruments could offer higher yields. The price of the existing bond would then fall because its fixed coupon becomes less attractive.

The investor faces a choice: Continue holding the lower-yielding security or sell it at a potentially lower market price and reinvest at higher prevailing rates.

Long maturity may not match the investor’s needs: A 30- or 40-year security is suitable only for investors with a genuinely long investment horizon. An investor who may need the money in five or 10 years remains exposed to the market price at the time of exit. Although G-Secs can be sold in the secondary market, liquidity is concentrated in select securities. An investor may, therefore, have to accept an unfavourable price, particularly in less actively traded securities.

In such cases, shorter-maturity G-Secs, gilt funds or bank deposits may provide a better match between the investment horizon and the financial goal.

Coupon payments create reinvestment risk: Long-term G-Secs and SDLs generally pay coupons every six months. While this provides regular income, investors seeking long-term wealth accumulation face reinvestment risk because each coupon has to be deployed at prevailing market rates.

If interest rates decline, subsequent coupons may have to be reinvested at lower rates. Thus, the eventual return from a long-term bond depends not only on the purchase yield but also on what happens to the coupon reinvestment rates.

What should investors do?

Long-term G-Secs and SDLs can be useful for investors seeking sovereign-backed income and willing to remain invested for a long period. The yield pick-up over 10-year G-Secs can be attractive, particularly for conservative investors looking to lock in rates.

One way to reduce this long-term holding risk is through a G-Sec ladder. Instead of putting a large amount into a single 20- or 30-year bond, investors can spread investments across different maturities, say five, 10, 15 and 20 years. As each security matures, the proceeds can be reinvested at prevailing rates. This reduces the risk of locking the entire portfolio into a single interest-rate cycle. But this exposes investors to reinvestment risk and relatively-lower coupon rates on shorter-tenure securities.

Gilt funds

Investors seeking exposure to long-term G-Secs without selecting individual bonds can consider gilt mutual funds. These funds invest predominantly in G-Secs and offer diversification and daily liquidity. They also eliminate the need for investors to manually reinvest every coupon.

Long-duration gilt funds can also benefit significantly when yields fall. A 20-year rolling-return analysis over a 25-year period shows that some of the better-performing gilt funds have delivered average annualised returns of around 7.2-8.3 per cent.

Funds such as Nippon India Nivesh Lakshya Long Duration Fund specifically focus on long-term G-Secs, with a substantial allocation to G-Secs having more than 20 years of residual maturity.

However, gilt funds do not eliminate interest-rate risk. Their NAV can fall sharply when yields rise, and investors do not have the certainty of receiving a fixed amount on a predetermined maturity date as they would with an individual G-Sec held until maturity.

Investors unwilling to take long-duration risk have several alternatives. RBI Floating Rate Savings Bonds currently offer an 8.05 per cent annual interest rate, reset every six months, and have a seven-year maturity. Small savings instruments such as the five-year National Savings Certificate (NSC), at 7.7 per cent, and the five-year Senior Citizens’ Savings Scheme (SCSS), at 8.2 per cent, also offer competitive rates.

Interest from G-Secs is taxable at the investor’s applicable income-tax slab rate, similar to bank fixed deposit interest.

Published on August 22, 2026