Gilt Mutual Funds

• 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.

• The interest on gilts is levied tax-free when invested for a minimum period (five years) and a maximum period (ten years). The interest rate paid by the government on gilts varies from year to year from 1% up to 7%. Gilt fund returns are also subject to inflation so that investors get more income every year as prices continue to rise. This increase in yield means that gilt funds tend to outpace fixed deposit returns over a certain period of time.
• Payment of interest on gilt funds is made at maturity.
• During the life of a gilt, the value of the security held by an investor typically varies from -10% to +15%. The total return over a period will depend on the interest rate paid by the government and other factors such as market volatility.
• Gilt funds are also known as variable and inflation-linked securities.

This is because these funds are floated in the market by the Government. The Government tries its best to fulfil the obligations of the funds. While there are no credit risks, gilt funds come with interest rate risks.

When the interest rates increase for the funds, the NAV tends to fall sharply, impacting the fund’s performance.

Returns

Returns are another factor that you must consider before picking a gilt fund for investment. The interest rates of a gilt fund can go up to 12%. However, the interest income is not guaranteed, and the rate keeps fluctuating. Therefore, you should try to invest in gilt funds when the interest rates are coming down.

The best thing about investing in gilt funds is that during an economic slump, it delivers decent returns, sometimes even greater than equity funds.

Cost

Gilt funds come with an expense ratio. You need to pay an annual fee to compensate the fund managers. You must check a gilt fund’s operating cost before investing in it. As per SEBI, the cost cannot go beyond 2.25%. However, it might change depending on the investment strategy deployed by the fund manager.

Horizon of Investments

Most gilt funds are medium and long-term funds. On average, the maturity period of a gilt fund varies from 3 years to 5 years. Therefore, these funds might not be ideal if you are looking for short-term gains. You must have a horizon of 3 to 5 years to invest in these funds.

Financial Goals

You need to set your financial goals before investing in gilt funds. If you are looking for high returns, equity funds would be your better choice. However, if you want a wealth gain over the medium term, you can invest in gilt funds. You can bank on the interest rate volatility and hope the market will favour you. Also, if safe investments are your priority, you must invest in a gilt fund.

Taxes

Taxes have a significant impact on your capital gains. The tax rate depends on the duration for which you hold the security. Gilt funds promise short-term capital gains, so you must pay the taxes accordingly. Also, if you hold the fund for more than three years, a long-term capital gains tax of 20% will be applicable.

• 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.

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.

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.