Home
>
Articles
>
What is Gilt Fund?

What is Gilt Fund?

Last updated: 22 Nov, 2021 | 09:58 am

Gilt Funds: Gilt Mutual Funds Definition, Risks & Returns | INDmoney

Gilt funds are mutual debt funds that invest primarily in fixed-income securities issued by the Indian government and states.

What is a Gilt Fund?

So you might be thinking, what are gilt funds? Gilt funds are debt funds that invest primarily in securities issued by India's central and state governments. These securities are issued when the government needs money to fund a specific project. These securities differ in terms of interest or coupon rate and maturity period.

The Reserve Bank of India (RBI) issues government securities on behalf of the government. Gilt funds do not invest in corporate securities, lowering the fund's risk. Gilt funds are an excellent investment option to earn high returns while taking on low risk.

How do gilt funds work?

The best Gilt funds are classified into two types. Gilt funds, for example, primarily invest in government securities with varying maturities. Second, gilt funds with a ten-year constant maturity must invest at least 80% of their assets in ten-year government securities.

Investors should keep in mind that there is no risk of default because these schemes invest in government securities. However, they do pose a significant interest rate risk. Government securities set the tone for interest rates in both the money market and the economy. The benchmark is the most commonly traded 10-year government security. Its yield movement sets the tone for bond market trading. Traders, for example, look for trading opportunities based on the difference in interest rates between government bonds and corporate bonds or between the 10-year bond and other government bonds.

When the Reserve Bank of India (RBI) starts lowering interest rates, demand for previously issued government securities rises due to their higher interest rate. When demand rises, their prices rise as well, and yields fall. Bond price-yield is the inverse relationship between bond price and yield. The opposite trend occurs when the RBI pauses or begins raising policy rates. Because the new bonds have a higher interest rate, demand for older bonds will decrease, or traders will sell them. As a result, their prices are decreasing while their yields are increasing.

Risks and Returns of Gilt Funds

  • Associated Risks: 

When investing in gilt mutual funds, you must know both credit risk and interest rate risk. The inability of the borrower to pay the dues is referred to as credit risk. The public believes gilt funds are free of credit risk because the government backs them. On the other hand, investors frequently overlook that, while gilt funds do not pose a credit risk, they are susceptible to changes in interest rates. Interest rate risk refers to the price change caused by changes in interest rates, and this relationship is negative or inverse for the NAV of a gilt fund scheme. A change in interest rates causes a change in the NAV, which causes returns to fluctuate. Because of this extreme volatility, gilt funds have emerged as the riskiest debt investment class. According to this logic, a falling interest rate environment would be advantageous for gilt funds and, as a result, for investing in them.

  • Lukewarm Track record: 

Over the last ten years, gilt funds have historically provided a positive return to investors. Over the next two years, performance is expected to improve, with funds returning 14%. They outperform bank FDs in this regard. Investors benefited from the scenario of falling interest rates.

  • Investment scope: However, keep in mind that, while the repayment obligation is guaranteed, the returns on gilt funds are not. They are highly volatile due to interest rate fluctuations. During periods of economic turmoil and slowing, gilt funds are expected to deliver spectacular returns; however, rising interest rates will almost certainly result in lower to negative returns on investment.

Benefits of investing in Gilt Funds

Here are some of the benefits of investing in Gilt Funds:

  1. Excellent returns: Gilt funds are well-known for their ability to deliver moderate returns while posing little to no risk. Investors should consider these funds with short to medium-term investment horizons.
  2. Exposure to governmental securities: Some government securities are not available to retail investors directly. Individuals can only gain exposure to such government securities by investing in gilt funds.
  3. Minimal Credit Risk: Because the underlying securities are government-issued, gilt funds are thought to have little to no credit risk. Gilt funds are suitable for risk-averse investors because the government will never default on its obligations.

Things to consider before investing in gilt funds India

Consider these factors before investing in gilt funds:

  • Returns: 

Gilt funds have the potential to generate returns of up to 12%. On the other hand, returns on gilt funds are not guaranteed and fluctuate dramatically as interest rates change. As a result, when interest rates are falling, it is advantageous to invest in Gilt funds. Furthermore, even if the economy is in a slump, Gilt funds are expected to outperform even equity funds.

  • Risk Factor:

Gilt funds, as opposed to corporate bond funds, are the most liquid instruments due to their lack of credit risk. This is because the government will always do everything in its power to meet its obligations. Gilt funds, on the other hand, are particularly susceptible to interest rate risk. During periods of rising interest rates, the fund's net asset value (NAV) plummets.

  • Cost: 

Gilt funds charge an annual expense ratio that covers the fund manager's fee and other associated expenses. This is expressed as a percentage of the fund's average asset under management. According to SEBI guidelines, the maximum expense ratio for debt funds is 2.25%. On the other hand, the fund manager’s investment strategy may determine the operating cost of a specific fund. For example, a dynamic approach entails buying and selling securities in response to changes in interest rates.

  • Financial goals: 

If you want to build wealth over time, consider investing in gilt funds to capitalise on interest rate volatility. In other words, if the overall capital markets are in decline and you're looking for safe havens to earn short-term returns, gilt funds could be a good choice.

  • Investment Horizon: 

Gilt funds invest in government securities with medium to long maturities. A gilt fund portfolio's average maturity ranges from three to five years. If you want to invest in gilt funds, you should have a time horizon of three to five years.

  • Tax on Profits: 

Your gilt fund's capital gains are taxable. The tax rate is determined by the holding period or how long you remain invested in a gilt fund. A short-term capital gain occurs within three years (STCG). Long-term capital gains are defined as gains accumulated over a three-year or longer period (LTCG). The STCG will be paid to investors through gilt funds, and they will be required to pay the applicable income tax. In contrast, the LTCG tax is a flat 20% with indexation benefits.

Who should invest in gilt funds?

  • Gilt funds only invest in government securities with medium to long maturities. As a result, these funds meet investors' security requirements. 
  • On the other hand, Bond funds may invest a portion of their assets in risky corporate bonds. Gilt funds invest in low-risk debt instruments like government securities to preserve capital while providing moderate returns. 
  • Despite its lower return, a gilt fund has higher asset quality than a traditional equity fund. It is frequently regarded as a haven for risk-averse investors interested in investing in government securities.

How to start investing in gilt funds?

Indmoney makes investing in gilt funds, already a low-risk investment, even more fluid and streamlined. With no brokerage charges, tracking, no account opening fees, it is a great idea to channel your investments through Indmoney. Here's the process:

  1. Sign up at Indmoney
  2. Enter your details such as the amount of investment and period of investment
  3. Have your e-KYC done in a few minutes
  4. Invest in your favourite gilt funds from our curated lists 

Frequently Asked Questions

Q1. What is the meaning of gilt funds?

Ans: Gilt funds are funds that invest in fixed-income securities issued by the federal and state governments.

Q2. Are gilt funds a safe investment?

Ans: Because gilt mutual funds invest in the government, they are thought to be safe.

Q3. Are gilt funds tax-free?

Ans: Your gilt fund's capital gains are taxable. The tax rate is determined by the holding period or how long you remain invested in a gilt fund. A short-term capital gain occurs within three years (STCG). Long-term capital gains are defined as gains accumulated over a three-year or longer period (LTCG). The STCG will be paid to investors through gilt funds, and they will be required to pay the applicable income tax. In contrast, the LTCG tax is a flat 20% with indexation benefits.

Q4. What are the expected returns of gilt funds?

Ans: Gilt funds have the potential to generate returns of up to 12%. On the other hand, returns on gilt funds are not guaranteed and fluctuate dramatically as interest rates change. As a result, when interest rates are falling, it is advantageous to invest in Gilt funds. Furthermore, even if the economy is slumping, Gilt funds are expected to outperform even equity funds.

Q5. Can I withdraw gilt funds anytime?

Ans: No. The returns and gains can only be withdrawn upon maturity.

Q6. How long should someone invest money in gilt funds?

Ans: A gilt fund portfolio's average maturity ranges from three to five years. If you want to invest in gilt funds, you should have a time horizon of at least three to five years.

We are a SEBI registered investement advisor
Mutual Funds watchlist
aditya birla sun life flexi cap fund growth direct plan|ABSL low duration fund direct growth|axis bluechip fund direct growth|axis capital builder fund series 4|axis balanced advantage fund direct growth|axis equity saver fund direct growth|axis multicap fund direct growth|axis global innovation fund of fund direct growth|axis long term equity fund growth NAV|axis quant fund direct growth|axis small cap fund direct growth|axis value fund direct growth|baroda dynamic equity fund direct growth|BOI AXA bluechip fund|canara robeco flexi cap fund direct growth|canara robeco small cap fund direct growth|canara robeco value fund direct growth|DSP quant fund direct|franklin india smaller companies fund direct growth|HDFC arbitrage fund direct growth|HDFC balanced advantage fund direct growth|HDFC developed world index fund NAV|HDFC flexi cap fund direct growth|HDFC housing opportunities fund direct growth|HDFC hybrid equity fund direct growth|HDFC nifty 50 index fund|HDFC index fund sensex plan|HDFC mid cap opportunities direct plan growth|HDFC multi asset fund direct growth|HDFC small cap fund direct growth|HDFC top 100 fund direct growth|HSBC midcap fund direct growth|ICICI prudential balanced advantage fund|ICICI bluechip fund direct growth NAV|ICICI prudential commodities fund direct plan growth|ICICI nasdaq 100 fund direct growth|ICICI nifty next 50 index fund direct growth|ICICI small cap fund direct growth|ICICI prudential technology direct plan growth calculator|ICICI ultra short term fund direct growth|IDBI india top 100 equity fund direct growth|IDBI small cap fund direct growth|idfc us equity fund of fund direct growth|kotak short term fund direct growth|kotak emerging equity fund direct growth|kotak multicap fund direct growth|kotak global innovation fund of fund NAV|kotak gold fund direct growth|kotak savings fund direct growth|kotak small cap fund direct growth|L&T emerging businesses fund direct growth|mirae asset large cap fund direct growth|mirae asset midcap fund|motilal oswal nasdaq 100 fund of fund|navi nifty 50 index fund direct growth|nippon india banking and financial services fund direct growth|nippon banking fund direct|nippon india flexi cap fund NAV|nippon india large cap fund direct growth|nippon india pharma fund direct growth|nippon india small cap fund direct growth|PGIM small cap fund direct growth|quant flexi cap fund direct growth|quant infrastructure fund direct growth|quant tax plan direct plan growth|SBI bluechip fund direct growth|SBI corporate bond fund direct growth|SBI equity minimum variance fund direct growth|SBI flexi cap fund|SBI magnum children's benefit fund investment direct plan|SBI nifty index fund direct growth|SBI small cap fund direct growth|SBI technology opportunities fund direct growth|tata banking and financial services fund direct plan growth|tata business cycle fund|tata technology fund direct growth|tata equity pe fund direct growth|tata ethical fund direct growth NAV|tata focused fund direct growth|tata index fund nifty direct plan|tata india tax savings fund direct plan growth|UTI focused equity fund direct growth|UTI nifty index fund direct growth NAV|UTI nifty 50 index fund direct growth