What is Gilt Fund: Meaning, Types, Advantages & Risks

A gilt fund is a mutual fund investment in government securities, including government bonds, qualifying as part of a larger category called debt funds. To understand the gilt fund, we need to first understand government securities. Government securities, abbreviated to G-Sec, are debt instruments issued by the central or state governments to raise revenues for public expenditure. Debt funds that only invest in G-secs are called gilt funds. Since golden-edged certificates were used for prior issues of national bonds, these investments came to be referred to as golden “gilt” funds. Due to their government guarantee and rating, they carry minimal risk.

What is a Gilt Fund?

If the union or state governments require more funds, they contact the RBI (Reserve Bank of India). The RBI raises revenue for our governments by borrowing from insurance firms and banks. In exchange for the money granted by the banks, the RBI offers fixed-term securities to them in which an experienced and devoted fund manager invests. After maturity, these securities are returned to the government, and investors get the amount deposited. Investors looking for moderate returns with lower risk can choose them. However, the service is mostly reliant on interest movement. Investors should wait for interest rates to drop before putting their money into a trustworthy fund.

Under the standard of the SEBI, a gilt fund is required to invest at least 80% of the assets of the securities issued by the government. 

Types of Gilt Funds

There are two kinds of gilt funds. One invests in conventional government securities, which are typically adequate funds. The other kind are funds with a ten-year constant maturity. Gilt Fund must invest at least 80% of its assets in government-issued securities over ten years.

Because these systems invest in state-owned assets, investors may be sure their investments are low-risk. However, they may have high interest rates, significantly impacting the money market and economic interest rates. The standard 10-year government bond is the one that is sold the most. Trading in the bond or fund markets is based on how its return changes over time. Traders who want to make money may look for chances based on spreads or differences in interest rates between government-issued and business bonds, 10-year bonds, and other state and central government bonds.

The Benefits of Investing in Gilt Funds

• Government securities experience: The funds and securities initiated by the government need to be more approachable to private investors. Gilt funds are beautiful opportunities for retail investors to gain exposure, expertise, and experience by putting in bonds undertaken by the government and earning the best low-risk and decent returns.
• Minimal credit risk: These securities are government issues, carrying the least or nil risk through gilt mutual funds.
• Good return: The Fund ensures an excellent return in gilt funds suitable for medium-term periods.

Who Should Invest in Gilt Fund?

Gilt funds are for potential investors interested in putting their funds in government bonds with a medium-to-long investment period. Investors may find them to be more dependable and secure than market or asset-based corporate funds, yet they are still different.

Besides having low yields, these funds have excellent asset quality compared to equity funds. This makes these funds an ideal investment for the risk-averse investor.

As an Investor, the Following Has to be Taken Care of:

Revenue: Gilt funds can earn you up to 12%. Not only is it not given, but it can also change if the total interest rate changes. But even in bad economic times, bond funds can make more money than stock funds, at the very least.

Cost: Gilt funds charge an expense ratio, the annual fee the manager takes for managing, as per the fund manager's and others' expenses. As per SEBI requirements, the maximum cost ratio is 2.25%. However, a variation may occur in the operating costs in which the fund manager initiates the strategy.

Investment period: Gilt funds are typically for medium- to long-term maturities ranging from three to five years.

Financial goals: If you want to take advantage of the fact that interest rates change constantly, gilt funds are a great medium-term investment that can make you rich. If you want low-risk, short-term profits, the golden fund might be your best choice.

Tax on profit: The gain on the gilt fund would be taxed. The tax rates vary according to your holding term. Capital gains achieved within three years are referred to as short-term capital gains (STCG), whereas those realised beyond three years are referred to as long-term capital gains (LTCG). Investors are required to pay income tax on the STCG received from the gilt fund. The LTCG tax is charged at a fixed rate of 20% but benefits from indexing.

Risks of Investing in Gilt Funds

Similar to other forms of investing, there are risks in investing in Gilt, too:

Interest rate rise regime: Returns on gilt funds are covered under the enhancement regime of interest rates. It is a reverse relationship between the bond price and interest rate, which affects golden fund returns.

Low on Liquidity: Even though they aren't as easily traded as stock equities, investments in government bonds via gilt funds are solid bets. Changing to bonds issued by the government is troublesome.

Investment period: The characteristic of gilt funds is investing in medium to long-term government bonds with a portfolio average maturity of three to five years.

How Does the Gilt Fund Diversify Its Holdings?

Gilt funds invest in various kinds of government-issued securities with maturities like:

A long-term gilt fund: A long-term gilt fund is a long-term fund under which an investor can invest in long-term/government bonds. The tenure is over five years and can increase even to 30 years.

Short-term monetary fund: A short-term fund is a kind of investment vehicle that focuses on short-term government or long-term bonds with short-term maturities.

How to Invest in a Gilt Fund?

Here is the procedure. You may shape your phrases using information from this. 

• Register on INDmoney by providing your phone number and verifying it with an OTP.
• Fulfill the digital KYC procedure by supplying the required information.
• Look for the gilt fund you want to invest in.
• Deposit money into your INDmoney wallet to begin investing.

What is the Ideal Time Frame to Invest in Your Gilt Funds?

Gilt funds generally invest their money in government securities, which are best suited for investment for a tenure of medium or long, that is, from six months to five years. This tenure of investment can be even over five years, but this is the tenure ideally one should have in investing in gilt funds. By increasing the tenure of your investment, chances are you might get better returns with reduced risk on these investments.

What is the Method Used to Compute the Returns of Gilt Funds?

Therefore, the average return on Gilt funds in a single financial year lies between 3-3.06% p.a. Three years returns can be calculated at 7.98% per year for five years, and the annualised returns are 7.07% per annum.

Conclusion

Lower interest rates have been working positively for India's gilt funds. The investment trusts in India have achieved double-digit returns from the gilt funds, which may be subject to volatility and provide negative returns due to fluctuating interest rates. Investors in gilt funds should use caution, though generally, gilt funds are considered secure investments.