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Investments are linked to financial goals. When such goals can be achieved through investments that carry lower risk, bonds and debt instruments are a safer bet compared to equities. This is where short, medium or long-term bonds come in.
Keep in mind that almost every kind of investment bond has a certain degree of risk attached to them. It is the decision of the investor as to how much risk he can sustain.
The risk factor depends on the type of investment you choose to invest in. Some funds are considered to be less risky than others. Government securities can be classified as one of them. These funds are called Gilt Funds.
The question that arises is what is a Gilt Fund and as an investor, is it more lucrative than other securities?
What is a Gilt Fund
There are various kinds of Debt Funds where you can choose to invest. Gilt Funds are one such type of Debt Fund. Gilt Funds invests in bonds and securities which are issued by the government, both state and central. These instruments are fixed-interest generating securities.
It is essential to mention that the largest borrower of the Indian Debt market is the government. It means that the money which the government borrows is by issuing securities. This means that the government is the guarantor for these borrowed funds. This capital is then directed towards infrastructure projects funded by the government as well as expenses incurred in various sectors.
This makes them a rather safe investment option for investors.
Gilt Fund invests in instruments of various maturities. These funds are categorized as low-risk securities as the borrower is the government. Hence, the risk of non-payment of interest or principal amount is relatively low. However, like most Debt Funds, Gilt Funds are also affected by the fall and rise of the interest rate scenarios.
How do Gilt Funds Work
Like most of you, the government has a bank, The Reserve Bank of India (RBI). Whenever the government needs funds, they head to the RBI. Being the apex bank, RBI lends the money to the government. These funds are borrowed from various entities like insurance companies and banks.
A secured loan requires some collateral to be issued to the RBI. In exchange for this loan, RBI issues government securities with a fixed tenure. This government security with a fixed tenure is where fund managers subscribe. This is a Gilt Fund.
Since Gilt Funds are fixed tenure securities, upon maturity, you return the fund to the government and receive the payout. As an investor, Gilt Funds presents the perfect combination of low risk and fixed return.
Benefits of Investing in Gilt Funds
Before investing in a Gilt fund, it is important to understand the benefits of the same. Below are the benefits of Gilt Funds:
- Lower Credit Risk: Investments carry a degree of risk. However, the credit risk associated with Gilt Funds is minimal. Gilt Funds are issued by the government, the likelihood of default on its payments is low. However, the change in the interest rates will affect Gilt Funds.
- Returns: The returns on Gilt Funds depend on the changing interest rates. This means that there is no fixed return amount on the investment as it will vary. Gilt Funds are a good investment choice if you want to achieve medium-term financial goals.
- Capital Protection: Gilt Funds invest in government securities. This means that there is minimal credit risk attached to these funds. In the same way, Gilt Funds also provide capital protection as there is minimal possibility of the government defaulting on the loan.
- Government Securities: Retail investors do not have easy access to some government securities. This access is given to fund houses. Investing in Gilt Funds through a fund house gives you access to these government securities.
Who Should Invest in Gilt Funds
If you know what Gilt Fund is, there is no doubt that these Debt Funds can be an excellent investment tool. Gilt Funds work for almost every kind of investor. However, you can choose to invest in Gilt Funds depending on your financial goal and risk appetite.
Gilt Funds carry minimal risk and can be considered to be secure. They tend to invest in either medium-term or long-term tenures. This satisfies the security aspect for investors. They know that their funds are secure as the borrower is the government.
For conservative, risk-averse investors, Gilt Funds are a good way to start investing. The risk associated with the Gilt Fund is minimal. Despite lower returns, Gilt Funds also offer better asset quality as compared to other Debt Funds.
For the conservative investor who wants to invest in government securities, Gilt Funds offer an ideal instrument for investment
Things to Consider as an Investor
Here is a list of things you have to consider as an investor before investing in Gilt Funds.
- Financial Goal: The financial goal of an investment is to achieve the targeted needs of an individual. Before investing, you need to understand the purpose of the investment. If the goal is to accumulate wealth over a medium-term tenure, then Gilt Funds can be a good investment option.
- Taxes on Gains: The gains received on your Gilt Funds are taxable. The Gilt Fund taxation depends on how long you stay invested in Gilt Funds. A gain or profit that has been received for less than 36 months attracts short-term capital gain tax which is applicable as per the income tax slab of the investor. If the Gilt Fund has been invested for more than 3 years or, you will have to pay 20% long-term capital gain tax with the benefit of indexation.
- Expense Ratio: Gilt Funds have expense ratios similar to Mutual Funds. This would be the average percentage of the fund’s total assets. The upper limit of expense ratio as per SEBI guidelines is 2.25%. The operating fund, which may not form a part of the expense ratio would be different and depends on the fund manager.
- Returns: Being government securities, Gilt Funds can yield returns varying 4-6%. This is highly dependent on the fall and rise of the interest rate in the market. Investing during the falling interest rate is a good strategy as Gilt Funds can provide superior returns.
- Risk: Gilt Funds as an instrument of investment carry minimal or no credit risk as you invest in government securities. This isn’t true for corporate bonds. However, there is a risk of a dip in returns especially when the interest rates rise. This is also when the net asset value or the NAV drops.
Frequently Asked Questions (FAQs)
1. Are Gilt Funds Good Investments?
Gilt Funds are considered to be a good investment as they carry minimal or no credit risk. However, returns Gilt Funds will be dependent on the interest rate regime. Also, unpredictable economic events can affect Gilt Funds considerably.
2. Does Gilt Fund Have An Exit Load?
When it comes to Gilt Funds, the exit load depends on the fund house. Many fund houses do not charge exit load.
3. Can We Invest SIP In Gilt Fund?
Long-term investors can consider investing in Gilt Funds through SIPs.
4. Is there a Lock-in Period for Gilt Funds?
No, These funds do not have a mandatory lock-in period.
