What are Gilt funds?

Gilt funds are the type of mutual funds, which invests in government securities issued by central & state governments. There are different types of debt funds and Gilt funds are one of those. These funds have the lowest risk out of all the debt funds as these are invested with the government.   

How do Gilt funds work?  

Whenever the government requires money, they approach Reserve Bank of India (RBI), a banker to the government and apex bank. RBI lends the money to the government after borrowing from entities like banks and insurance companies. In exchange for the loan, RBI issues government securities for a fixed tenure. Then, the fund managers subscribe to these government securities, which have varying maturities.  

Things to consider by an investor:  

Risk factor: Gilt funds have no credit risk as they are invested in the government securities while government never defaults & fulfils all the obligations along with carrying the risk of interest rate risk. Interest rate and Gilt funds’ NAV are inversely related; when interest rates rise, then NAV of gilt funds fall and when interest rates fall, then the NAV of gilt fund rises. Individuals, who are risk-averse, should consider investing in these types of funds.  

Investment horizon: Government securities have maturities ranging from medium-term (3-5 years) to long-term (7-10 years). Individuals, who can invest for this time period, should consider investing in these funds. 

Returns: Returns from gilt funds are not guaranteed as they are variable with changes in the interest rates. If one invests in these funds when interest rates are falling, then they can earn higher returns. By investing in these funds, it is guaranteed that your capital would be preserved.   

Expense ratio: Like other mutual funds schemes, these funds also charge some amount as fees in order to manage the funds. The expense ratio may differ according to the fund manager’s investment strategy.   

Taxation: Any capital gains arising on these funds vary, depending upon the term of the investment. If the capital gains arising are less than three years, then it will be termed as short-term capital gain, which will be further taxed as per the Income Tax slabs. On the other hand, if the capital gains arising are more than three years, then it will be called a long-term capital gain, taxed at the rate of 20 per cent.  

Some top Gilt funds in India are:  

The following chart depicts the top four Gilt funds based on 1-year and 3-year returns of different funds along with their AUMs: