Gilt Mutual Funds: Are They a Safe Investment Option?

Gilt funds are a great option for risk-averse retail investors. But what exactly are gilt funds, and why are they considered relatively safe?

What Are Gilt Funds Are They a Safe Investment Option

Many retail investors believe that dealing in market-linked instruments and investments is a highly risky business. However, that's not true for every investment option. There are certain types of mutual funds that are safer than the others and offer protection from volatility. Enter gilt funds. 

What is a gilt fund? And why is it regarded as a safe investment option? Here's all you need to know about how these funds work and who can invest in them.  

Understanding gilt funds

Gilt funds are a type of debt mutual fund which invests in government securities issued by state and central governments. They derive their name from golden-edged certificates in which government bonds were issued. 

Typically, gilt funds are of two types. One that invests in government securities across different maturities. Second, that invests with a constant maturity of 10 years. The second category of gilt funds must compulsorily invest a minimum of 80 per cent of their assets in government securities with a maturity of 10 years. 

Also read: Best debt mutual funds to invest in India

Now that we have understood what a gilt fund is let's look at how it works.

How do gilt mutual funds work?

When the Government of India requires funds, it approaches the apex bank, i.e. the Reserve Bank of India (RBI). The RBI acts as a banker by lending money to the government after borrowing from entities such as banks and insurance companies. It then issues government securities in exchange for the loan. The fund manager of a gilt fund subscribes to these securities that are issued for a fixed tenure. Upon maturity, the gilt fund receives money after returning the government securities. 

Are gilt mutual funds safe?

Unlike mutual funds that invest in corporate bonds, gilt funds invest in government securities only. So, there is no credit risk. involved, as the government issuing the underlying securities may never default. This is the reason gilt funds are considered a safe investment option with moderate returns at minimal to no risk.

Also read: How are mutual funds taxed?

What are the risks associated with gilt funds?

While gilt funds may not carry any credit risk, they carry an interest rate risk. As overall interest rates change, the Net Asset Value (NAV) of the fund changes too. It's best to invest in gilt funds at a time when interest rates are rising. 

Are gilt funds a good investment option?

Gilt funds are a great alternative to a conventional fixed deposit scheme. If you have an investment horizon of at least three to five years, they can be a good investment option offering low risk and moderate returns. For risk-averse investors, gilt funds can ensure the preservation of capital coupled with decent returns. The past 3-year returns of the top 5 gilt funds in India have been in the range of 6.95% to 8.86%.

Before you invest, make sure you understand that gilt funds charge an annual fee known as the expense ratio. It takes into account the fund manager's fee and other related fund-management expenses. For debt funds, the upper limit of this ratio is 2.25 per cent. Furthermore, capital gains from gilt funds are taxable. If you hold them for less than 36 months, you need to pay Short Term Capital Gains (STCG) as per your income tax slab. For a duration of more than 36 months, the Long Term Capital Gains (LTCG) get taxed at 20% with indexation benefits.

​Also read: Mutual Funds: What You Should Know Before Investing in Different Types of Mutual Funds

Final words

If you have a mutual fund portfolio that is already inclined towards equity funds, you can add more stability and diversification by adding gilt funds to it. 


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