Gilt Funds

Gilt funds are open-ended, debt-based mutual funds which invest at least 80% of their total assets in government securities. These securities can have varying maturity periods. 

 

Due to the secure nature of government securities, these funds carry almost negligible credit risk. However, they remain highly susceptible to interest rate changes.

There are three types of gilt funds you should consider investing in, namely:

• Gilt Fund (With Any Maturity Period)

 

These types of gilt funds invest in G-Secs with varied maturity timelines. For example, funds can be invested in short-duration securities with a maturity period of less than 3 years. 

 

Or, they can be invested in medium-duration securities for a period ranging between 4 and 5 years. Apart from these durations, these funds can also be invested for a longer timeline of up to 15 years.

• Gilt Funds With a 10-Year Constant Maturity

 

As the name suggests, these gilt funds have exposure only to G-Secs with a fixed 10-year duration. 

• Target Maturity Index Funds

 

Target maturity index funds are a type of gilt mutual fund with specific maturity dates. Such funds invest in the securities included in the underlying Gilt Index.

Gilt funds invest money into securities and bonds, which are issued by the RBI on behalf of central and state governments. Known as G-Secs or government securities, the RBI issues these bonds for fixed tenors against funds sourced from banks and insurance organisations.

 

Governments direct these funds towards infrastructure and public projects. Gilt funds invest in these securities, and once the security matures, the fund returns it and receives a payout. Hence, when you invest in a gilt fund, your money goes towards government-funded projects and undertakings.

The government backing makes these funds extremely low risk in terms of the credit risk parameter. However, returns are not guaranteed since there is no predetermined coupon rate. The interest you receive depends entirely on the fluctuation in interest rate cycles. 

This also makes gilt mutual funds highly sensitive to falling and rising interest rates. Due to this, the best time to invest in gilt funds is during a falling interest rate regime. When interest rates rise, the risk of loss will also increase.

There are a few advantages of investing in gilt mutual funds, namely:

• Liquidity

 

Gilt funds have the highest liquidity among debt instruments due to their underlying portfolio, comprising mainly G-Secs that carry sovereign ratings. Moreover, being an open-ended mutual fund, the exit or redemption option is quite easily accessible. 

• Access to Government Securities

 

These funds make investing in multiple G-Secs with a minimum investment amount extremely easy. Otherwise, investing in G-Secs, which typically have market lot size deals of about ₹25 Crores, is not an easy feat.

The single biggest drawback to be considered before investing in gilt funds is the risk involved. While these may yield great returns and carry lower risk than equity funds, the interest risk factor should not be overlooked. 

 

In case of rising interest rates, there is a high chance that the value of your investment will drastically fall.

Here are a couple of pointers to consider before investing in gilt funds:

• Returns

 

Gilt funds returns are exceptionally good when the economy is in a slump, even overtaking equity funds. You can earn good returns even during the short term, provided the interest rates are in a falling cycle. Your earnings will include interest income and capital gains. 

• Taxation

 

Gilt funds are taxed similar to other debt funds. For a holding period greater than 36 months, you can expect a long-term capital gains tax of 20% with indexation benefit. For a holding period of less than that, you will be taxed according to your income tax slab.

Gilt funds are considered to be low-risk debt instruments which offer reasonable returns and capital preservation. If you have a medium to long-term investment horizon and prefer the security of investing in G-secs, gilt funds are a good option. 

These also suit risk-averse investors seeking higher returns than those offered by FDs. To invest in some of the top mutual funds, log on to Bajaj Markets. The platform provides access to various types of mutual funds and invest based on your financial goals.