Gilt Funds

What Are Gilt Funds?

Gilt funds are the debt funds that invest in Government of India securities. The Government issues these securities when it needs money to finance a particular project. The interest or coupon rate and maturity period of these securities vary. The Government Securities are issued by the Reserve Bank of India (RBI) on behalf of the Government.

Gilt funds do not invest in corporate securities, thus reducing risk to a greater extent. Gilt funds have a good track record: Like a savings account, fixed deposits, and recurring deposits, Gilt funds have a good track record of lower risk with higher Gilt funds returns than other investment options. The market risk of Gilt Funds is reduced because of the diversification that comes from investing in many securities and across a number of issuers. The credit risk is also reduced because the Government is unlikely to default on its debt obligations.

Who Should Invest in Gilt Funds?

Here is a list of investors who should invest in Gilt Funds:

  • Investors who want a low-risk investment are content to leave their capital in Gilt funds for a long time. Investors planning for the long term: Like a savings account, fixed deposits, and recurring deposits, Gilt funds have a good track record of lower risk with higher returns than other investment options. Gilt funds can also be used as an additional source of income by topping up your monthly SIPs over long periods of time.
  • Investors looking to protect their capital, especially in uncertain economic times or when the markets are volatile.
  • Investors who have a large portfolio so as not to put a large percentage of their capital in one fund.
  • Investors who like to diversify their portfolio.
  • Investors looking for a portfolio that can be actively managed, with buy and sell decisions taken on a regular basis.
  • Investors who have limited investment time and a set goal: Gilt funds have been one of the preferred investments for long-term goals. Therefore, they are an ideal choice for investors who want to invest on a regular basis. Being a debt instrument, you need not worry about the equity markets being volatile.
  •  Investors who don't want to worry about issues like market timing: Gilt funds are an ideal option for investors that do not want to worry about timing the markets but rather would like an assured return.

Taxability of Gilt Funds:

  • Gilt funds are considered capital asset that is not liable to income tax. This means that investors need not file any tax returns every year on their investment in gilts.
  • The interest earned on gilt funds is also tax-free if invested for a minimum period of five years and a maximum period of 10 years. Moreover, the interest earned on gilt funds remains exempt from Income-tax (I-T) when the investment is held for a period of five or more years.
  • If an investor does not invest in Gilt funds for a minimum of five years, then such earnings are considered other income and subject to tax at the applicable rate.
  • The redemption value of Gilt funds is not included in the income of the investor and hence is not liable to I-T. However, if an individual invests in a gilt fund for less than five years, but the fund maintains an average maturity of more than five years, then such earnings are subject to tax at the applicable rate.

Risks Involved With Gilt Funds:

1) Gilt funds carry risks similar to that of corporate securities. These include the risk of default and interest rate risks.

2) Gilt funds are subjected to taxation by the Income Tax Act. Investors would be eligible for deduction under section 80C or any other applicable sections up to 50% of their total income, thus making it cost-effective in the long run.

3) Gilt funds are subjected to capital gains tax if they are sold before maturity. They can be sold before the maturity date only if one incurs a loss on them, whereas there is a lock-in period of 3 years from the date of allotment, which prohibits early withdrawal.

4) Gilt funds are susceptible to interest rate movements in the economy. Therefore, a rise in the interest rates would lead to a fall in the value of gilts. However, the impact can be less when compared to corporate bonds since the Government of India backs these funds.

5) From time to time, some other risks can result from a change of economic environments created by falling stock markets and other macro factors, which affect gilt fund investments as well.

Advantages of Gilt Funds:

1) High Liquidity: Compared to Debt instruments like Treasury Bills and Fixed Deposits, Gilt funds offer better liquidity than similar duration instruments. In addition, since gilts do not represent interest payments at the time of maturity, they are highly liquid investments.

2) Tax Exempt: Gilt funds are exempt from tax, whereas T-Bills are taxable. Thus, even if one has higher tax liability on their income, the gilt funds can invest in tax-saving assets, like fixed deposits and recurring deposits.

Nascent India offers a range of debt instruments, like Gilt funds. We have detailed the salient features of a few schemes listed in this article:

3) Interest rate: Gilt funds are typically fixed-term instruments with a maturity period of 10 years or more. An investment in gilt funds is usually made for a fixed-term period of 10 years or more.

4) Maturity Period: The maturity period depends on the term lengths offered by the state governments and some other issues related to coupon rates, Gilt funds return, etc.