Gilt mutual funds invest in Government securities or bonds with varying maturities. The term Gilt also refers to the sovereign (Government of India) guarantee for these types of securities. Investors should know that the Government guarantee is concerning the credit risk of these securities; Gilt prices are subject to interest rate risk.
Bond prices are inversely related to interest rate movements; if the interest rate moves downwards, bond prices increase, and vice versa. Interest rate risk is directly related to the maturity of debt securities. The longer the maturity, the higher the interest rate risk; the shorter the maturity, the lower the interest rate risk.
How do Gilt funds work?
If the Government of India wants funds (or loans), then the Reserve Bank of India is approached (RBI). In addition to being the apex bank, the RBI also represents the government as a banker. After borrowing from other bodies, such as insurance companies and banks, the RBI loans money to the government.
In exchange for the loan, the RBI issues fixed tenure government securities which are subscribed to by the fund manager of a gold fund. Upon maturity, this gilt fund returns the government Set term shares that are subscribed to by the portfolio manager of a gold fund. This gold fund returns the government securities upon maturity and collects money in return. Gilded funds can be a perfect combination of low risk and fair returns for an investor. Nevertheless, the findings are very dependent on the movement of interest rates. So, the perfect time to invest in gold funds will be to have a falling interest rate system.
Who should invest in Gilt funds?
Gilt funds invest only in government securities that range from short to long-term horizons. Thus, these funds meet investors' security needs. They are not the same as bond funds because they can assign part of the assets, which can be risky, to corporate bonds. Gilt funds invest in low-risk debt instruments, such as government securities, which, along with modest returns, ensure capital preservation.
A gilt fund offers greater asset quality compared to a traditional equity fund, despite the comparatively lower return it offers. For those investors who are risk-averse and choose to invest in government securities, it is also considered an ideal investment haven.
Features of Gilt Funds
- Zero Credit Risk - Gilt funds have zero credit risk, unlike mutual funds investing in corporate bonds where there is still substantial credit risk. This is because their duties are normally met by the government. In the case of corporate bonds, the same is not true.
- Capital Protection - Although no mutual fund provides 100% capital security, one of the few that bear minimal risk is gold funds. Investments are made in government-backed securities, and the chances of any significant capital loss are close to none.
- Invest in Securities Not Available to Retail Investors - The bulk of government securities for institutional investors are not eligible. But such securities are required to be subscribed to by institutional investors such as fund houses. So, you get to invest indirectly in certain government securities by investing in gold funds.
- Reasonable Returns - Gilt funds offer respectable returns as opposed to many other investment options, even though you are investing in the short to medium term. This is an excellent choice, combined with the minimal risk, for risk-averse investors.
Long Term GILT
Average maturities of underlying securities in long term gilt mutual funds can range between 15 to 30 years; these funds are highly sensitive to interest rate changes. Gilt Mutual Funds can give negative short term returns if interest rate movement is unfavorable. However, over a sufficiently long investment horizon, in an environment of declining interest rates, long term gilt mutual funds can give good returns.
Short-Term GILT
Average maturities of underlying securities in short term gilt funds can range between 5 to 7 years; therefore, the interest rate risk is significantly lower than the long term gilt mutual funds. Short term gilt mutual funds are less volatile than long term gilt mutual funds; they outperform long term gilt mutual funds in rising interest rate environment but underperform in declining interest environment. Medium-term gilt mutual funds invest in government securities which have intermediate maturity profiles; longer than short term gilt mutual funds, but shorter than long term gilt mutual funds. These funds combine the characteristics of both long term gilt mutual funds and short term gilt mutual funds.
Medium Term GILT
Medium-term gilt mutual funds are less volatile compared to long term gilt mutual funds and at the same time, can give higher returns than short term gilt mutual funds in a favorable interest rate scenario. As such, these mutual funds are suitable for debt mutual fund investors with moderate risk tolerance levels.
Investors should have a sufficiently long investment horizon and some appetite for volatility in medium-term or long-term gilt mutual funds.
From a taxation viewpoint, gilt mutual funds are taxed just as debt mutual funds. Capital gains held for less than 3 years are treated as short term capital gain and taxed as per the income tax rate of the investor. Capital gains on investments held for more than 3 years are treated as long term capital gains and taxed at 20% after allowing for indexation benefits. Dividends paid by the gilt mutual funds are though tax-free in the hands of the investors, the scheme has a paid dividend distribution tax (DDT) at the rate of 28.8% for individual investors and Hindu Undivided Families (HUF) and 34.6% in case of corporates.
Risk
Gilt funds are the most liquid instruments, since they do not bear credit risk, unlike corporate bond funds. The explanation is that the government will always do its best to fulfill its responsibilities. However, gilt funds mainly suffer from an interest rate risk. During periods of an increasing interest rate system, the fund's net asset value (NAV) drops sharply.
Returns
Gilt funds are capable of delivering returns of up to 12% . However, returns from gold funds are not guaranteed and are extremely volatile in relation to adjustments in overall interest rates. Therefore, as interest rates are falling, it will be profitable to invest in Gilt funds. Gilt funds are still also able to produce better returns than even equity funds as the economy as a whole experiences a recession.
People Often Ask
- What is gilt in a mutual fund?
- What is the difference between gilt and debt funds?
- Which Gilt Fund is best?
- Edelweiss Government Securities Fund
- DSP Government Securities Fund
- IDFC - GSF - Investment Plan
- SBI Magnum Gilt Fund
- Is it a good time to buy gilt funds?
Gilt mutual funds invest in Government securities or bonds with varying maturities. The term Gilt also refers to the sovereign (Government of India) guarantee for these types of securities.
GILT fund invests solely in government securities and debt fund invests in fixed income instruments, it can be of government or private sector.
Some of the best Gilt funds are -
Falling interest regime is the best time to invest in gilt funds.
Conclusion
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