Shine your investment star with gilt funds

The star of gilt funds could rise once again. The cycle of repo rate increases does not continue indefinitely. According to economists, when interest rates begin to decrease, gilt funds are more successful in earning higher returns in such situations.

What are Gilt Funds?

Gilt funds are mutual funds that primarily invest in government securities (G-Secs). While traditional debt funds invest in various debt instruments, gilt funds focus solely on one category of debt instruments: G-Secs. These securities are issued by the Reserve Bank of India on behalf of the Indian government. Being sovereign papers, G-Secs carry no credit risk. Typically, institutional investors like large investors invest in G-Secs, but gilt funds allow small investors to benefit from investing in G-Secs. Their durations vary, allowing investors to choose short-term or long-term gilt funds according to their convenience.

Benefits of Declining Interest Rates

When interest rates rise, the prices of government securities fall, negatively impacting not only the prices of G-Secs but also the returns on gilt funds. Generally, the higher the average maturity period of the funds, the more fluctuations they are likely to experience.

Are Gilt Funds Risk-Free?

Gilt funds are not entirely risk-free. Their returns are not guaranteed like those of bank fixed deposits or savings accounts. Fiscal deficits and the country’s debt burden can affect the performance of G-Secs and consequently the returns on gilt funds. The most significant risk in gilt funds is interest rate risk. When interest rates rise, the prices of government securities fall, adversely affecting the performance of gilt funds. Another risk is the lower liquidity in government securities. Gilt funds invest in government securities that are not traded actively.

Who Should Invest in Gilt Funds?

Gilt funds are a good option for investors who do not want to take risks or prefer to take lower risks. Despite being low-risk, gilt funds have provided good returns. Mid-term investors find gilt funds quite attractive at the moment. According to Waqar Naqvi, Chief Executive Officer of Taurus Mutual Fund, it is anticipated that the phase of declining interest rates will begin in April, leading to an increase in G-Sec prices. Certainly, funds investing in G-Secs will benefit from this. Investors looking for better returns than fixed deposits with low risk for a period of one to one and a half years should consider investing in gilt funds. They will yield good returns in a low-interest-rate environment. Investors planning for a longer investment period should opt for mutual funds’ Monthly Income Plans (MIPs). As interest rates decrease, companies will have lower interest payments, increasing their profits. MIPs invest a small portion in equity, allowing investors to benefit not only from the debt market’s gains but also from the stock market’s strength

Charges for Gilt Funds

Generally, if you withdraw from gilt funds before completing one year, an exit load of one percent is charged. After one year, there is no exit load

Tax Calculation on Gilt Fund Investments

If you sell the units within one year, the amount received is added to your income and taxed according to your tax bracket. This is known as short-term capital gains tax. Selling units after one year results in long-term capital gains tax. These gains are taxed at 10 percent without indexation and 20 percent with indexation. Since gilt funds do not invest in equity, they are not subject to any securities transaction tax.