Gilt Mutual Funds

Table of Contents

• What Are Gilt Funds ?
• How do Gilt Funds Work?
• Features of Gilt Mutual Funds 
  • Gilt mutual funds perform inversely with respect to interest rates. 
  • The risk profile of gilt funds is relatively low. 
  • Gilt Mutual Funds usually require a 3-5 year investment horizon. 
  • Gilt Mutual Funds charge an annual fee.
  • Gilt Mutual Funds are subject to capital gains tax.
• When Should You Invest in Gilt Mutual Funds ?
  • When you want to accumulate wealth in the medium term. 
  • When the capital markets are going down. 
  • When you expect a cut in interest rates. 
  • When you want to invest in mutual funds but have a low-risk appetite 
  • When you want to invest in government securities but don’t want to do so directly 
• Are Gilt Funds The Right Choice?  

Gilt mutual funds are the best options when it comes to investing your hard earned money. The truth of the matter is that there is no one size fits all approach when it comes to investments. The investment portfolio that leaves you satisfied will be very different from that of someone else’s. That’s because an ideal investment portfolio depends on your income, your lifestyle, your life stage, as well as your risk appetite. 

One such investment option is gilt funds. Gilt funds work great for people who want to invest in bonds and mutual funds but do not have the risk appetite to invest in equity shares or corporate bonds. While the potential upside is higher with the latter, so is the degree of risk. 

What Are Gilt Funds ?

Gilt funds are a type of mutual funds that invest in medium and long-term government securities of various types. Gilt funds invest not only in government securities but also central government loans and state development loans with a medium or long-term horizon. 

How do Gilt Funds Work?

The Government of India often needs funds for various activities, for example, building state infrastructure. In such a scenario, it goes to the central bank, the RBI (Reserve Bank of India) to get a loan. The RBI takes money from entities like banks and insurance companies and lends it to the government. 

The RBI then issues government securities in lieu of this money and these securities are subscribed to by the gilt fund managers. Once the securities mature, the gilt funds return them in exchange for the amount invested plus the interest. 

Features of Gilt Mutual Funds

Here are some of the essential features of gilt funds which make them a unique investment option. 

Gilt mutual funds perform inversely with respect to interest rates.

A rising interest rate regime leads to a fall in the price of the underlying security prices and reduces the returns on gilt funds. Likewise, a falling interest rate regime means that gilt funds will perform better. Thus, the best time to invest in gilt funds is when an interest rate cut is expected in the near future. 

The risk profile of gilt funds is relatively low.

This is because a stable Government including ours never defaults on their loans. This makes the risk of major losses in a gilt fund practically negligible. 

Gilt Mutual Funds usually require a 3-5 year investment horizon.

Most government securities have a medium to long-term investment horizon. While the investment manager in charge of the gilt fund will continuously buy and sell securities based on the interest rate climate, it is nonetheless wise to have a time horizon of at least 3 to 5 years when investing in gilt funds. 

Gilt Mutual Funds charge an annual fee.

 Like all other mutual funds, gilt funds also charge an annual fee which is expressed as a percentage of the total assets under management. This fee covers the fund manager’s fees and other operational costs. As per SEBI guidelines, this annual fee should not exceed 2.5% of the total assets under management. Each gilt fund has a different annual fee based on the fund manager’s investment strategy. It’s important to make sure the fee is as low as possible. 

Gilt Mutual Funds are subject to capital gains tax.

 If the fund is held for a period of fewer than three years, the investor is subject to short-term capital gains (STCG) tax whereas if it is held for a period greater than three years, then it is subject to long-term capital gains (LTCG) tax. Short-term capital gains are also added to an investor’s income and are subject to income tax as per the tax slab. Long-term capital gains are subject to a 20% tax with indexation and 10% without indexation. 

When Should You Invest in Gilt Mutual Funds ?

Investing in gilt mutual funds is the right choice in the following circumstances. 

When you want to accumulate wealth in the medium term.

Gilt funds are the right way to go in this scenario because you can take advantage of the volatility in interest rates and get high returns on gilt funds in the medium term. 

When the capital markets are going down.

Gilt funds are a safe haven to park your funds when the capital markets are in a downward spiral. This is because they have consistent returns which are unaffected by the volatility of the capital markets. They are one of the best investment options when the economy as a whole is in a slump. 

When you expect a cut in interest rates.

If the central bank is expected to reduce interest rates in the near future, the returns from a gilt fund will increase. This is the best time to invest in gilt funds to make high returns. . 

When you want to invest in mutual funds but have a low-risk appetite

If you want to start investing in mutual funds and are looking to earn a higher rate than that available on fixed deposits, a gilt fund is a good place to start. Since they invest in AAA Government securities, gilt funds are ideal if you have a low-risk appetite. 

When you want to invest in government securities but don’t want to do so directly

With gilt funds, you can invest in a diverse range of government securities. Moreover, the minimum investment needed is only Rs. 5000. Thus, it makes sense for most retail investors to invest in government securities through gilt funds rather than doing so directly. 

Are Gilt Funds The Right Choice? 

Despite many benefits, gilt funds are not always the best choice. They are not 100% secure(vis-a-vis gold or fixed deposits), their returns fluctuate based on interest rate volatility, and they are relatively illiquid as they cannot be traded like other securities. So Mutual funds are always subject to market risk

Nonetheless, according to the CRISIL Mutual Fund Ranking, Gilt Funds performed the best among 22 categories of mutual funds. If you are looking for a relatively low-risk investment option with reasonable returns,