Why the 60 bp yield gap in long-dated G-secs cuts both ways

There is also an opportunity-cost trap. If interest rates rise after the purchase, newly issued bonds will offer higher yields. The existing bond's price will fall because its coupon looks less attractive. The holder has to choose between keeping a below-market yield or selling at a loss to reinvest higher. For an investor who can hold to maturity, the yield is locked in. But a 30- or 40-year security only suits someone who is certain they will not need the money for that long. Liquidity in the secondary market is concentrated in a few securities, and less actively traded bonds can force an unfavourable exit price.

Coupon payments create their own risk. Each semi-annual coupon has to be reinvested at prevailing rates. If rates fall, the coupons get redeployed at lower yields, and the eventual return depends on the reinvestment path, not just the purchase yield. One way to spread that risk is a G-sec ladder – buying across maturities of five, 10, 15 and 20 years so that each maturity can be reinvested at the rate available when it comes due. The trade-off is that shorter-tenure bonds carry lower coupons, and the ladder exposes the portfolio to reinvestment risk across the whole curve.

Gilt mutual funds offer another route. Funds like Nippon India Nivesh Lakshya Long Duration Fund allocate heavily to G-secs with more than 20 years of residual maturity. A 20-year rolling-return analysis shows that some of the better-performing long-duration gilt funds have delivered average annualised returns around 7.2 to 8.3 percent, according to data cited in the filing. But these funds do not eliminate interest-rate risk – their net asset value can fall sharply when yields rise, and investors do not have the certainty of a fixed maturity date payout that a held-to-maturity individual bond provides.

For investors unwilling to take long-duration risk, alternatives exist. The RBI Floating Rate Savings Bond currently offers 8.05 percent, reset every six months, with a seven-year maturity. Small savings instruments like the five-year National Savings Certificate at 7.7 percent and the five-year Senior Citizens' Savings Scheme at 8.2 percent are also competitive. Interest from G-secs is taxed at the slab rate, same as bank fixed deposits. The decision comes down to the investment horizon and whether the extra yield genuinely compensates for the price risk and reinvestment uncertainty that comes with longer maturities.