BusinessGilt Funds

Gilt Funds


Gilt funds are debt funds that primarily invest in bonds and fixed interest-bearing securities issued by the central and state governments. These investments are made in instruments with various maturities. Since these funds are invested with the government, the risk associated with them is considered to be minimal.

These securities are issued by the Reserve Bank of India (RBI) on behalf of the government. The maturities of these securities range from medium to long term. Since gilt mutual funds invest in government securities, they are generally considered secure. The interest rate on these instruments is set by the RBI, making them low-risk investment options.

Whenever the state or central government requires funds, it approaches the Reserve Bank of India (RBI), the country’s central bank and the government’s banker. The RBI obtains the necessary funds from banks and insurance companies and lends them to state and central governments. In return, the Reserve Bank of India issues g-secs or fixed-term government securities. Gilt Funds subscribe to these securities. The fund returns the security and receives a payout when it matures.

For the majority of conservative investors, gilt funds offer the ideal balance of decent returns and low risks. However, it is essential to realize that gilt funds are affected by interest rate changes.

Factors to Consider Before Investing

  1. Risks: These are the most liquid schemes and carry minimal credit risk because the government backs them. There is, however, a risk associated with interest rates. Usually, during a period of rising interest rates, its NAV falls significantly.
  2. Returns: In the past, it has produced relatively high returns. It does not guarantee returns. The returns change according to the interest rates the RBI announces. In a situation of declining interest rates, these funds provide high returns.
  3. Investment horizon: A gilt mutual fund generally matures between three and five years. As a result, in order to invest in these funds, one must have a comparable investment horizon. In addition, these funds can assist investors in generating wealth over the medium term. Additionally, investors might make good returns in the short term if interest rates were to fall.
  4. The investment strategy and financial objectives: Gilt funds are the ideal option if the investment objective is to build up steady returns without taking on credit risk. They are good options to obtain solid short-term returns in the event of a falling market.
  5. Expense ratio: It also has a management fee and other associated expenses, just like any mutual fund. Depending on the investment strategy used by the fund manager, the operational cost varies.  Therefore, when undertaking investment planning and setting goals, an investor must take the expense ratio into account.
  6. Taxation: Capital gains from your gilt fund are taxable. The tax rate is determined by the holding period, i.e., the length of time an investor holds a gilt fund. A capital gain made in less than three years is referred to as a short-term capital gain (STCG). Long-term capital gains are gains generated over three years or more (LTCG).

Who Should Invest In Gilt Funds?

Gilt funds only invest in government securities with medium- to long-term horizons. Thus, these funds fulfil the investors’ requirement for security. They differ from bond funds, which may invest a portion of their assets in potentially hazardous corporate bonds. Gilt funds invest in low-risk debt instruments, such as government securities, ensuring capital preservation and moderate returns. It is frequently seen as a good investment option for risk-averse investors looking to invest in government securities. For instance, with Kuvera you can explore various gilt funds options like the SBI Magnum Gilt Fund.

The Advantages of Investing in Gilt Funds

The following are some advantages of investing in gilt funds:

  1. Excellent returns: Gilt funds are well-known for their ability to generate good returns with minimal risk. Investors with short- to medium-term horizons should explore these funds.
  2. Exposure to governmental securities: Some government securities are unavailable directly to regular investors. Individuals can only have access to these government securities through investments in gilt funds.
  3. Minimal Credit Risk: Due to the fact that the underlying assets are government-issued, gilt funds are regarded as having minimal to no credit risk. Because the government will always meet its obligations, gilt funds are excellent for risk-averse investors.

Frequently Asked Questions (FAQs)

1. Which is a good time to invest in gilt funds?

Gilt funds invest in medium to long-term government securities. Accordingly, these funds are subject to interest rate risk. When interest rates decrease, the NAV increases, and when interest rates increase, the NAV decreases. This causes yields to become negative in the short term. Therefore, the optimal moment to invest in gilt funds is when inflation is at its highest and the RBI is unlikely to raise rates in the near future.

The optimal time to invest in these funds is during a period of falling interest rates. The fund’s NAV will rise as a result of a decline in interest rates, resulting in an increase in short-term yields.

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