The risk you are willing to take with an investment plan greatly influences your best investment options. Investments are usually meant to safeguard your future while giving optimum returns. An aggressive investing approach can be taken if your risk appetite is more. However, debt funds are an excellent option to save your capital and make low-risk investments. There are different types of debt funds that you can choose from. One of the debt funds with shallow risk is Gilt Funds.
Gilt funds invest only in government securities which makes the risk involved in investing in Gilt Funds less. Investing in Gilt Funds could make a reasonable return while preserving your capital. Due to these reasons, Gilt funds can prove to be an ideal and secured investment. Investors who prefer investing in equity-oriented mutual funds also opt for a particular investment in Gilt Funds to hedge their exposure and reduce the risk involved. This method can help stabilize your portfolio as Gilt Funds improve the asset quality of your portfolio.
Gilt funds are the oldest debt funds and safest ways of investing. These debt funds existed in India even before Independence. These funds invest in bonds and fixed interest-bearing securities with varying maturities that the State and Central Governments issue. Any security investment offered by the government is a good choice for investors unwilling to take risks. According to the SEBI (Securities and Exchange Board of India) regulations, a Gilt Fund should invest 80% of its aggregate assets in fixed income-generating government securities. These investments are used in financing infrastructure projects introduced by Central and State Governments.
The types of gilt funds available in India are:
Besides being the country’s apex bank, RBI is also known as the Government’s banker. Therefore, whenever the State or the Central Government needs funds or loans, they approach the Reserve Bank of India (RBI). RBI collects the required amount from financial entities like insurance companies or banks and lends it to the government. In exchange, RBI issues fixed-tenure government securities, and Gilt Fund managers subscribe to these securities. On maturity, Gilt Funds receive the returns, which are then distributed to the investors. From an investor’s point of view, it is a lucrative investment as they get reasonable returns with minimum risks. The performance of these funds depends on the movements in the interest rates. The best time to invest in these Gilt Funds would ideally be when the interest rates fall.
Gilt Funds are a reliable option, and they are gaining importance due to the following reasons:
Gilt Funds have a minimum risk as the government issues them. This is a safe investing method when the issuer is trustworthy and will fulfil its obligations. Since there is a low chance of loss, your capital is also protected.
These government securities are not available to retail investors. Institutional investors like fund houses are allowed to subscribe.
Gilt Funds offer good returns to investors with short- to medium-term investment plans. Risk-averse investors have a better opportunity as the risk involved is very low.
However, here are some essential factors to consider before you start your investment journey with Gilt Funds.
The only risk involved in Gilt Funds is the fluctuating interest rates. If RBI increases the repo rate, other risk-free securities become a more viable investment. Repo rates are the rates at which banks and financial institutions can borrow money from the RBI.
With more investors turning to other assets during this time, the value of a debt fund offering a similar interest rate reduces because investors can enjoy the same benefit from other sources. When interest rates increase, the Gilt Fund’s NAV (Net Asset Value) drops sharply. At the same time, if the repo rates fall, the value of a debt fund giving a higher interest rate automatically increases, thus increasing the NAV and the returns.
Gilt Funds are also considered illiquid securities. This means you cannot liquidate your funds or exit your position quickly, even in an emergency.
The gains in the Gilt Fund depend on the changes in the interest rate. The payments cannot be guaranteed. These funds can generate returns of up to 12%. Investment in Gilt funds can also be made when the economy is falling. During this period, the returns could be higher than equity funds.
Like any other mutual fund, Gilt Fund charges a fee which is called an expense ratio. This expense ratio covers the expenses like fund management services, fund managers fees, and associated expenses. According to SEBI regulations, the upper limit for expense ratio is 2.25% of the fund value. However, the operating costs may vary depending upon the fund manager’s strategy.
On average, Gilt Funds have a maturity period of 3 to 5 years. Your investment horizon could also be within this period. These funds help in generating wealth over the medium term. You can earn good returns in a short time if interest rates fall. Accordingly, you can plan a diversified investment.
The gains from most investments are taxable. The rate of taxation depends on the holding period, which refers to the tenure of the investment. Profits made in less than three years are called short-term capital gains (STCG). You will have to pay the income tax when the funds mature.
A capital gain made for more than 3 years is considered a long-term capital gain (LTCG). The income tax for LTCG is 20%, along with indexation benefits that could help lower your taxable income.
If you choose to invest in Gilt Funds, you will enjoy a low-risk investment that will also work well to create a diversified portfolio when paired with slightly more risky investments. Make sure you assess the market conditions before investing in a Gilt Fund to maximise your investment and grow your wealth efficiently. The recommended asset allocation of a well-diversified portfolio always includes government-issued securities to bring down the risk of the portfolio, which is precisely where Gilt Funds can come in.
Usually, Gilt Funds are invested in government securities for a period of 6 months to 5 years. Investing in Gilt Funds for a medium or long-term tenure is safe. This is the ideal tenure for investing. However, the investment can be for more than 5 years. The chance of getting better results is by increasing the term and reducing the risks of these investments.
As per SEBI regulations, Gilt Funds have to invest 80% of their money in debt instruments issued by the government. The Gilt Mutual Fund decides the tenure of the Gilt Funds
Yes, some gilt funds come with a lock-in period, typically seen in 10-year gilt funds.
Since Gilt Funds function like Mutual Funds, a monthly investment can also be made, and as a long-term investment, your returns can multiply significantly through the power of compounding.
