Gilt Funds - Features, Risk and Returns | Top performing Gilt Funds

Gilt Funds - Features, Risk and Returns | Top Performing Gilt Funds

Gilt Funds - Features, Risk and Returns | Top Performing Gilt Funds
© Pixabay | Gilt Funds - Features, Risk and Returns
Gilt funds are a form of debt funds that primarily invest in Government bonds and securities. The investment risk in Gilt funds is low and comparatively safer than equity mutual funds.

Mutual Funds broadly have two categories: Equity Funds and Debt Funds. Both fund types have their advantages and disadvantages. The returns from equity mutual funds are not predictable as these funds majorly invest in equity stocks in the stock market. Due to the market's volatility, equity funds are not suitable for earning fixed returns.

On the other hand, Debt funds are also known as fixed-income funds. If you are looking for a safe investment tool that creates a steady return for you, Debt funds may be right for you. Debt funds majorly invest in fixed-income instruments, such as government bonds, corporate bonds, corporate debt securities, treasury bills, commercial papers, etc. These funds are comparatively safer than equity funds for the short to medium term. 

Debt mutual funds can be multiple types, like Corporate Bond Fund, Credit Risk Fund, Gilt Fund, Short Duration Fund, Liquid Fund, Fixed-Income Fund, etc. Each type of mutual fund invests in debt instruments with different investment strategies. In this article, we are about to discuss the Gilt mutual funds and why and when you should invest in such funds.

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What is the Gilt fund? 

Gilt funds are debt mutual funds and are ideal for medium to long-term investments. These funds mainly invest in Government securities and bonds. A gilt fund must invest at least 80% into Government securities of its assets. The fund managers are independent of investing remaining in other debt assets.

Gilt funds bear almost zero credit risk as it invests in g-secs or government securities. However, there is an interest risk associated with Gilt funds. An individual can invest in a gilt fund anytime, but the ideal time to invest in a gilt fund is when the interest rate is low for a long time and possibilities to increase the interest rate in the near future. 

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Who can invest in Gilt Funds?

A Gilt fund mainly invests in debt instruments which makes it a safer and low-risk investment option than equity mutual funds. Those who are looking for a safe investment with a slightly higher interest rate than bank fixed deposits can invest in gilt funds for the medium to long term horizon. Alternatively, those who have equity funds and want to allocate some portion of investment in safe instruments can also invest in these funds. 

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Things to be considered before investing in Gilt Funds

Every investment carries some benefits and shortcomings. Here are the factors you should consider before investing in a Gilt mutual fund:

  • Returns: Returns from Gilt funds are not fixed and can vary from time to time. If Government bonds are issued at a higher interest rate, you will receive a higher return. During the period of an economic slowdown, the interest rate of g-secs can go high. You can expect a positive return of around 7 to 10% or even 12% for a medium to long-term investment horizon. Gilt funds are not ideal for very short-term investment perspectives.
  • Risk Factor: Gilt funds are considered a safe investment option that does not carry much credit risk in them. That means the chance of losing invested capital is very low. But, there is a certain interest risk associated with gilt funds. Interest risk is the depreciation of invested assets made by the effect of fluctuating interest rates. However, long-term investment or investment through SIPs is ideal for avoiding such interest risk.
  • Expenses: Each mutual fund charges a small amount (in percent) of money for managing the fund, which is called the expense ratio. The percentage might vary from fund to fund. The typical expense ratio for a gilt fund is something between 0.5 and 2.25% per annum. It is better to choose mutual funds that cost less expense ratio for better returns for the long term.
  • Taxability: Income from Gilt funds is taxable. If you withdraw or redeem funds before three years, STCG (Short-Term Capital Gain) tax will be applicable. Short-term capital gain tax is subject to pay with income-tax returns. Fund redemption post three years, flat 20% LTGG (Long-Term Capital Gain) tax with indexation benefit (inflation-adjusted) will be applicable.

Best time to invest in Gilt Funds

Investment through SIPs for a long-term horizon does not require any timing. But if you are want to invest for a short time or with a lump sum, then try to invest in a Gilt fund when interest rates continuously fall or at the bottom level. This strategy might help to grow your funds faster in the short term.

Mutual Fund SIP Calculator 

How Gilt funds work? 

Gilt funds follow rules provisioned by state or central Governments that work in such a way: The government approach RBI whenever money is required. RBI then collects the money from banks and insurance companies by issuing bonds or securities on behalf of Governments with a fixed rate of interest. Gilt funds mainly invest money in such types of schemes. 

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Gilt fund vs Debt fund 

Gilt Fund  Debt Fund 
Gilt funds invest at least 80% of funds in Government Securities, Bonds, T-Bills, etc.  Debt funds are independent to invest in any debt instruments with any proportion. The debt instruments consist of corporate bonds, t-bills, g-secs, financial papers, PSU bonds, etc.
Credit Risk is low as it invests in Government bonds and securities.  Credit risk is higher than Gilt funds
Interest Risk is available in Gilt funds Debt funds also carry interest risk
Low-risk investment option Low to Medium risk investment option

Gilt Fund vs Fixed Deposit

Gilt Fund  Fixed Deposit 
The return from Gilt funds is not fixed. But mostly, gilt accumulates more corpus than an FD. The interest of a Fixed Deposit is fixed for a period.
Less secured than FDs  Highly Secured 
The gilt fund is highly liquid  Comparatively troublesome 
There is a chance of losing capital in Gilt funds due to the negative rate of interest. Capital is secured with FD

5 Top-performing Gilt funds in India

Fund AUM (Cr.) 6M. 1YR. 3YR. 5YR.
Nippon India Gilt Securities Fund 2,126.85 2.44% 10.77% 10.50% 10.26%
IDFC Government Securities Fund 2,177.80 3.33% 13.17% 11.54% 10.22%
Aditya Birla Sun Life Government Securities Fund 567.18 2.83% 11.66% 9.93% 10.11%
SBI Magnum Gilt Fund 4,355.98 2.83% 11.41% 9.91% 9.88%
DSP Government Securities Fund 606.84 3.23% 12.61% 10.94% 9.79%
Disclaimer: We are not giving any suggestions or recommendations. The purpose of writing this article is to elaborate and simplify financial schemes. The investment scheme may be outdated when you are reading this. So, the accuracy of the information is not guaranteed. Always read the latest scheme information before investing.

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