Gilt Funds: What Are They and Should You Invest?

Mutual funds are often associated with equity instruments. To an extent, even debt funds get some credit. But what if a mutual fund category were entirely built on the idea of government bonds? Well, that's where the Gilt Funds come into the picture.

Through this blog, let us explore the Gilt funds meaning, how they work and benefit you, their types, features, taxation, and much more.

Stay tuned to learn how Gilt mutual funds can potentially transform your portfolio!

What Is A Gilt Fund: Meaning And Its Features

Gilt funds are a form of debt mutual fund that invests solely in government securities. The sole purpose of this fund is to protect investors from market volatility. While equity funds chase highs and lows like a rollercoaster, Gilt funds quietly invest only in government securities. As a result, there is low credit risk and a sense of safety.

Think of Gilt mutual funds like lending money to your most trustworthy friend. Here, it's the government in whose securities you're eventually investing. Although expecting high returns is crazy, you'll sleep well at night knowing you're getting your money back (with interest).

Key Features of Gilt Mutual Funds include;

Invest in Government Securities

Gilt funds invest exclusively 80% of investors' money in central and state government bonds. The balance is invested in cash and cash equivalents. However, for standard Gilt funds, it's purely G-secs.

No Credit Risk

Since the government backs them, there's almost no chance of default.

Lock-in Period

Most Gilt funds have no lock-in period, offering easy entry and exit.

Open-Ended Funds

You can invest or withdraw anytime, just like regular mutual funds.

How Do Gilt Funds Work?

With an understanding of what is Gilt fund, the next step is to learn how the government plays a vital role in it. For instance, when the government needs funds, it borrows money via issuing sovereign bonds.

Over here, the Central Bank (or Reserve Bank of India) acts as a banker to such securities. Further, the Gilt Funds invest in them. These debt mutual funds then pool money from investors and invest only in government securities (G-Secs) like bonds or treasury bills.

The central or state government issues securities to raise money, and in return, they pay interest over time. Gilt fund returns mainly depend on interest rate movements. When rates fall, bond prices go up, and the fund performs well. It's vice versa if bond rates rise.

Benefits Of Gilt Funds

Investing in Gilt funds brings multiple benefits to the investors. For instance;

Low Investment, Easy Access

Gilt funds let retail investors invest in government bonds with small amounts (through SIPs).

Sovereign Safety

Backed by the Government of India, these Gilt funds carry low credit/default risk if held to maturity.

No Credit Risk

Unlike corporate debt, there's no risk of company default. Only 80% of the government securities are involved within the portfolio, and 20% lies in cash and cash equivalents.

Professional Fund Management

Fund managers manage entry/exits based on interest rate cycles, inflation trends, and economic indicators.

High Liquidity, No Lock-in

Most Gilt funds are open-ended and thus allow easy entry/exit without long lock-in periods.

YTM Helps Estimate Returns

Yield to Maturity indicates a fund's returns, but it must be interpreted in the context of interest rate trends. A higher YTM can mean lower returns and vice versa. Also, if held till maturity, there is still a sovereign guarantee on bonds.

Transparent & SEBI-Regulated

With Gilt funds, investors know exactly where their money is (in government-issued securities).

Types Of Gilt Funds in India

Based on the duration and asset allocation, there are primarily two types of Gilt funds in India. It includes;

Standard Gilt Funds (with Flexible Maturity)

• These Gilt funds invest in government securities of varying maturities - short, medium, or long-term.
• Here, the fund manager actively adjusts the portfolio based on interest rate outlook and market conditions.
• It is suitable for investors who want moderate risk and flexibility in returns.

Gilt Funds with 10-Year Constant Maturity

• These 10-year maturity funds invest at least 80% of their assets in government securities
• They are less flexible but give consistent duration exposure, making it highly sensitive to interest rate changes.
• It is suitable for investors who speculate on falling interest rates over the medium to long term.

(Bonus Fact: In 10-year constant maturity Gilt funds, HNIs have an AUM share of 59%, followed by 36.5% in traditional Gilt funds.)

Taxation On Gilt Funds In India

As per the latest tax rules (effective from April 1, 2023), Gilt funds bought after April 1st, 2023, are taxed and treated as STCG (irrespective of holding period). However, if there are gilt funds made before April 1, 2023, the taxation differs.

Here's how:

Investment Period	Holding Period	Tax Type	Tax Rate
Invested before April 1, 2023	Sold within 36 months (before Jul 23, 2024).	STCG	Taxed at the income tax slab rate.
	Within 24 months (on/after Jul 23, 2024).	STCG	Taxed at the income tax slab rate.
	Sold after 36+ months (before Jul 23, 2024).	LTCG	20% with indexation benefits.
	Sold after 24+ months (on/after Jul 23, 2024).	LTCG	12.5% (no indexation)
Invested on or after April 1, 2023	Any holding period	STCG	Taxed at the income tax slab rate.

Should You Invest In Gilt Funds?

The answer to whether investing in Gilt funds lies in your risk profile. For instance;

• If you're a conservative investor seeking safety (with low credit risk), these funds might be suitable
• Applies to those investors with a medium to long-term investment horizon.
• Those HNI or retail investors looking to Diversify Equity Portfolios.
• Investors who can speculate on interest rates and benefit from capital gains.

Final Thoughts

Gilt funds are a great option if you're looking for safety, transparency, and low credit risk. They give you access to government bonds without needing a large investment through SIPs. Also, with the different types of Gilt funds available in India, you can decide on the duration as well.

If you're someone who wants to invest without constantly checking the markets, Gilt funds could be your calm in the chaos. But, as it goes unsaid, investing comes with pros and cons. Do consider taking professional guidance before making any investment-related decisions.

Disclaimer: The information provided in this article is for educational and informational purposes only. Any financial figures, calculations, or projections shared are solely intended to illustrate concepts and should not be construed as investment advice. All scenarios mentioned are hypothetical and are used only for explanatory purposes. The content is based on information obtained from credible and publicly available sources. We do not guarantee the completeness, accuracy, or reliability of the data presented. Any references to the performance of indices, stocks, or financial products are purely illustrative and do not represent actual or future results. Actual investor experience may vary. Investors are advised to carefully read the scheme/product offering information document before making any decisions. Readers are advised to consult with a certified financial advisor before making any investment decisions. Neither the author nor the publishing entity shall be held responsible for any loss or liability arising from the use of this information.