Gilt Fund – Meaning, Features & How to Invest

Gilt Mutual Funds are one of the oldest forms of investment instruments in India. They invest in government-issued debt securities, which are known for being safe. This makes gilt funds a great choice for investors seeking low-risk investment options.

This article will discuss what is gilt fund is and everything you need to know about it.

What is Gilt Fund Meaning?

Gilt funds are a type of mutual funds that invest in government-issued bonds and fixed-interest securities issued by the state government, central government, and the Reserve Bank of India. These funds pool money from several investors to invest in government securities with varying maturities. Gilt funds are typically low risk investments because the government backs these securities.

Features of Gilt Funds

1. Low risk - These funds invest in government securities, so its nearly risk-free and offers zero default risk.

2. Gilt fund lock-In period- Gilt funds do not have a lock-in period, as you can withdraw your money at any time. However, certain gilt fund might feature a lock-in period, so it is best to understand the terms before investing in any gilt fund.

How Does Gilt Mutual Funds Work?

Gilt mutual funds primarily invest in government securities with no credit risk, as these are backed by the central government. Fund managers allocate money into long-term and short-term government securities or bonds issued by the Reserve Bank of India (RBI). 

The RBI issues these bonds or g-secs with a fixed tenure when the central or state governments require funds. The RBI collects the necessary funds from financial institutions and insurance organizations and lends them to the government. 

In exchange, the RBI issues government securities and Gilt Funds invests in these securities. These funds have a fixed tenure and offer assured returns upon maturity.

Advantages of Gilt Funds

1. Zero credit risk - Gilt funds buy bonds of the government, making it extremely safe with zero credit risk than corporate bonds.

2. Access to special securities - Not every government security is available to everyone. This means that you can invest in those special securities by investing in Gilt funds.

3. Reasonable returns - Gilt funds are the best for short to medium term investment because they bring good returns with minimal risk.

Disadvantages of gilt funds

1. Interest rate risk - The return on Gilt funds is influenced by changes in the interest rates. This means, if the interest rate increase, the value of existing Gilt funds may decline and vice versa. So, it is important to consider the interest rate movement before investing.

2. Low liquidity - Since gilt funds are extremely volatile to market conditions, it might become difficult to transact these funds in the market when you're in urgent need of funds.

Taxation Rules of Gilt Funds

The returns from gilt funds are taxed based on the holding period:

1. Short-Term Capital Gains (STCG): If units are held for less than 36 months, returns are added to your income and taxed according to your income slab.

2. Long-Term Capital Gains (LTCG): For units held over three years, returns are taxed at 20%, which reduces tax liability by accounting for inflation.

How to Invest in Gilt Funds?

You can invest in gilt funds in two ways, which are as follows:

1. Through an AMC portal: You can invest directly by going to the website of the particular AMC that offers Gilt Funds.

2. Using an app- You can download a financial app, create an account, go through the KYC process and you are good to start investing.

Conclusion

Gilt Funds are a safe investment choice because they invest in government bonds. They are good for people who want low-risk and stable returns. However, it is important to understand that if interest rates rise, gilt funds may decline in value, and as such, they may be hard to sell when you need your money.

FAQs

What is the risk of gilt debt funds?

Gilt debt funds primarily face interest rate risk. When interest rates rise, gilt fund prices may decline, leading to potential losses. 

Who should invest in Gilt funds?

Gilt funds are ideal for risk-averse investors seeking steady returns over the medium to long term. They suit those who want to diversify their portfolio and those with an investment horizon of 3 to 5 years.

Is investing in Gilt funds safe?

Investing in gilt funds is safe in terms of credit risk since they invest in government securities. However, they are sensitive to interest rate fluctuations, which can affect returns, especially in volatile markets.

Is it time to invest in gilt funds?

The best time to invest in gilt funds is when interest rates are expected to decline, as it increases bond prices and fund returns. Assess current interest rate trends and economic conditions before investing.