every fixed income article recommends G-Secs for retail investors. sovereign guarantee, zero credit risk, now available on RBI Retail Direct. agreed on all counts. but at 6.9% yield for a 10-year instrument in a 30% bracket you are taking home 4.83%. a well-rated corporate NCD at 8.5% nets you 5.95% at the same slab. that’s 112bps more for buying AA rather than sovereign. is the zero credit risk actually worth 112bps less annually?
The yield gap is real but the comparison needs to account for more than just credit risk. G-Secs are the most liquid fixed income instrument in India. If you need to exit before maturity, a G-Sec finds a buyer at a fair price far more easily than most corporate bonds. For retail investors who think they might need the money early, liquidity has genuine value that does not show up in the yield number.
but most retail buy-and-hold investors don’t exit early. so liquidity premium means nothing to them practically
exactly my point. for genuine buy and hold to maturity, you are giving up 112bps per year for a risk you statistically never need. REC and IRFC are AAA government-owned entities. the incremental default risk over a sovereign is effectively theoretical.
I’d push back slightly. The argument that government-owned AAA issuers are as safe as sovereigns has been mostly true but not universally. IL&FS had government backing at various levels. Not a PSU bond but the point stands: sovereign is categorically different from sovereign-backed. For very conservative capital the absolute certainty of G-Secs is not irrational even at a yield cost.
so G-Secs make sense if you really cannot tolerate any credit risk at all. otherwise AA government PSU bonds give meaningfully better returns