Gilt funds are mutual funds that invest primarily in government securities. These securities are issued by the central and state governments and are considered to be one of the safest types of debt instruments in India due to their underlying assets, which are sovereign in nature. Gilt funds aim to provide investors with a combination of safety, stability, and reasonable returns.
In this article, we will explore the meaning, working mechanism, types, potential returns, associated risks, and taxation aspects.
What are Gilt Funds?
Gilt Funds are a type of debt mutual fund that primarily invests in government securities and bonds issued by central and state governments. These securities offer fixed interest returns and come with different maturity periods. Because the investments are backed by the government, they are considered to carry minimal risk compared to other debt instruments. However, these funds are still subject to interest rate fluctuations, which can impact returns based on the market environment. Gilt Funds are generally seen as a secure investment option for conservative investors.
Several factors suggest that gilt funds could be a strategic choice for investors at present:
- Potential for capital appreciation: Long-duration gilt funds with a modified duration of around 10 years may offer capital appreciation in the range of 2-3% over the next year. This expectation is based on anticipated interest rate movements.
- Attractive yields: Gilt funds typically provide competitive yields, making them an appealing option for income-seeking investors.
- Portfolio diversification: Incorporating gilt funds into an investment portfolio can help diversify risk, as their performance tends to be less correlated with equity markets.
- Anticipated rate easing cycle: Experts predict a decline in interest rates in the upcoming fiscal year (FY25). This trend could further benefit long-duration gilt funds, as bond prices generally rise when interest rates fall.
Now that you know what Gilt Mutual Funds are, explore different mutual fund options to find the one that suits your financial goals. Compare Mutual Fund Options Now!
Features of Gilt Mutual Funds
Gilt funds share some characteristics with fixed and recurring deposits but differ in terms of interest payments. Unlike deposits, gilt funds do not distribute interest throughout the investment period; instead, interest is paid upon maturity. The interest on these funds is tax-free if held for 5 to 10 years. Government interest rates on gilts vary from 1% to 7%, and returns are often adjusted for inflation. While gilt fund values can fluctuate, they generally outperform fixed deposits over time, making them attractive for long-term, inflation-protected investments.
How do Gilt Mutual Funds work?
When the Central or State Government needs funds, it borrows through the Reserve Bank of India (RBI), which acts as the government’s banker. The RBI raises this money from banks, insurance companies, and other institutional investors, and lends it to the government. In return, the RBI issues government securities (G-secs) with fixed tenures and predetermined interest payments.
Gilt mutual funds invest primarily in these government securities. When the securities mature, the fund receives the principal amount along with interest, which contributes to the fund’s overall returns.
Gilt funds are often considered suitable for conservative investors because they carry negligible credit risk, as they are backed by the government. However, despite their safety, gilt funds are sensitive to interest rate movements. Changes in interest rates can impact the market value of government securities and, in turn, the fund’s returns.
Features of Gilt Mutual Funds
Gilt mutual funds are investment schemes that exclusively invest in government securities. These funds are ideal for investors seeking low-risk investment avenues with stable returns. Since they primarily hold sovereign-backed bonds, gilt funds are considered one of the safest mutual fund categories. Below are the key features of gilt mutual funds:
- Investment in Government Securities
Gilt funds allocate 100% of their portfolio to government bonds, eliminating credit risk and ensuring safety of capital. - Low Credit Risk
Since these funds invest in government-backed securities, there is no risk of default, making them a secure option for conservative investors. - Interest Rate Sensitivity
The returns from gilt funds are influenced by interest rate fluctuations. When interest rates decline, bond prices rise, leading to capital gains. Conversely, a rise in interest rates can reduce NAV. - Long-Term Investment Option
Gilt funds are best suited for long-term investors who can withstand short-term market fluctuations while benefiting from potential capital appreciation. - Moderate to High Volatility
While gilt funds are risk-free in terms of default, their NAV can be volatile due to market interest rate movements, making them less predictable in the short term. - Taxation Benefits
Gilt fund gains are subject to capital gains tax based on the holding period, with indexation benefits applicable on long-term capital gains (LTCG).
How to Invest in Gilt Funds?
Investing in gilt funds is a straightforward process and can be done in the following steps:
- Complete KYC formalities
Before investing, ensure your Know Your Customer (KYC) process is completed with valid identity and address proof. - Choose a suitable gilt fund
Compare different gilt funds based on factors such as past performance, expense ratio, fund duration, and the fund manager’s experience. - Select the investment mode
You can invest through a lump sum if you have surplus money or opt for a Systematic Investment Plan (SIP) to invest small amounts regularly. - Invest through a platform
Gilt funds can be purchased online via AMC websites, mutual fund platforms, or through registered mutual fund distributors.
Benefits of Investing in Gilt Mutual Funds
- Less risk: One of the main benefits of investing in gilt mutual funds is that they offer almost zero default risk. Since these funds invest primarily in government securities, they carry zero default risk.
Looking for a safe and stable investment option? Gilt Mutual Funds offer government-backed security. Start Investing with Just Rs. 100! - Steady and good returns: Gilt funds offer relatively stable returns compared to other mutual fund categories. They are less susceptible to market volatility, making them suitable for long-term financial goals. They may also offer higher returns than other types of debt instruments such as fixed deposits and savings accounts.
- Diversification: Gilt funds provide investors with a diversified portfolio of government securities with varying maturities. This diversification helps spread risk and minimize the impact of interest rate fluctuations.
