Gilt funds invest exclusively in fixed-income securities issued by the federal and state governments. Your money is going to government-funded infrastructure projects and other safe investments.
Gilt funds are one of India’s oldest investment alternatives, dating back to the country’s pre-independence days. They are a fantastic choice for risk-averse investors because government securities are recognized to be a safe investment route.
The gilt fund investors get their returns by investing in debt instruments, which create interest income. The performance of any gilt fund is determined by the direction of interest rates. As a result, they are highly recommended during the current rate-cutting period. Because when interest rates decline, prices begin to rise. The NAV(Net Asset Value) of gilt funds rises as a result of this. As a result, when interest rates start to decline, many investors migrate to gilt funds.
Working of Gilt Funds
When the Indian government requires finances , it turns to the Reserve Bank of India (RBI). The RBI serves as the government’s banker in addition to being the top bank. After borrowing from other institutions such as insurance firms and banks, the RBI provides money to the government. In repayment for the loan, the RBI issues government securities with a certain maturity date, which are subscribed to by the fund manager of a gilt fund. This gilt fund returns the government securities and receives money when they reach maturity. Gilt funds can be an ideal combination of low risk and decent returns for an investor. However, interest rate movements have a significant impact on performance.
Benefits of Investing in gilt funds
- Government Securities
Retail investors do not have direct access to some of the government securities. Individuals can gain exposure to such government instruments only through investing in them.
- Capital Protection
While no mutual fund can provide 100 percent capital protection, gilt funds are among the few that do. Investments are made in government-backed securities, therefore there is very little risk of a substantial financial loss.
- Minimal Credit risk
Because the government issues the underlying securities, gilt funds are thought to pose little to no credit risk. Because the government is unlikely to default on its obligations, gilt funds are a good choice for risk-averse investors.
- Great returns
Gilt funds have a reputation for providing reasonable returns with little to no risk. Individuals with short to medium-term investment views might consider these funds.
Disadvantages of investing in gilt funds
The most significant risk with these funds is interest rate volatility. If the RBI raises the repo rate, the returns could plummet. Aside from that, investment in gilt funds carries no major risk.
Furthermore, they are seen as illiquid investments. This means that in the event of an emergency, an investor will not be able to immediately quit his position and liquidate his capital.
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Who should invest in these gilt funds??
Gilt funds invest exclusively in government assets with medium to long-term maturities. As a result, these funds meet investors’ security requirements. They differ from bond funds in that the latter may invest a portion of their assets in riskier corporate bonds. Gilt funds invest in low-risk debt instruments like government securities, ensuring capital preservation while providing moderate returns. Despite the lower return, a gilt fund has superior asset quality than a standard equities fund. It is frequently seen as a good investment shelter for risk-averse individuals seeking to invest in government assets.
Things to consider before investing in gilt funds
- Risk
Gilt funds, unlike corporate bond funds, are the most liquid vehicles since they do not carry credit risk. The reason for this is that the government would always do its best to meet its duties. On the other hand, they are primarily exposed to interest rate risk. During periods of rising interest rates, the fund’s net asset value (NAV) plummets dramatically.
- Cost
Gilt funds have an annual fee known as the expense ratio, which covers the fund manager’s fee as well as additional costs. This is expressed as a percentage of the average asset under management of the fund. According to SEBI guidelines, the maximum expense ratio for debt funds is 2.25 percent. The running cost of a certain fund, on the other hand, may be determined by the fund manager’s investing strategy. For example, a dynamic method entails buying and selling securities in response to interest rate changes.
- Financial goals
If your goal is to build wealth over the medium term, you can consider investing in gilt funds to take advantage of interest rate volatility. In other cases, when the general capital markets are declining and you’re searching for a safe refuge to make short-term profits, it may be the best option.
- Tax on gains
Your gilt fund’s capital gains are taxable. The tax rate is determined by your holding period, or how long you keep your money in a gilt fund. The term “short-term capital gain” refers to a gain realised in less than three years (STCG). Long-term capital gains are defined as gains made over a period of three years or longer (LTCG). Investors will receive the STCG from GFs, and he will be responsible for paying the appropriate income tax. The long-term capital gains tax, on the other hand, is a flat 20% with indexation benefits.
Top 5 Guilt funds in India
When choosing a fund, you should look at it from a variety of angles. The best fund is determined by a variety of quantitative and qualitative factors. You should also consider your financial objectives, risk tolerance, and investing horizon. Based on their past 3-year and 5-year returns, the best 5 gilt funds in India are listed below:
| Fund Name | 3 Year Returns |
| ICICI Prudential Constant Maturity Gilt Fund | 8.86% |
| UTI Gilt Fund | 8.68% |
| SBI Magnum Gilt Fund | 8.17% |
| ICICI Prudential Gilt Fund | 7.00% |
| Canara Robeco Gilt Fund | 6.95% |
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