Gilt Funds: An Overview

Gilt fund is an open-ended fund that invests in government securities.

Mutual fund offers various sub-categories of debt funds. As per SEBI, there are 16 sub-categories of debt-oriented schemes which vary from short term, medium term to long term. As per the Association of Mutual Funds in India, the net AUM of the income or debt-oriented schemes is Rs 14,52,048.31 crore as of November 2021.

Out of 16 sub-categories, Gilt fund is one of the open-ended sub-categories which invests in government securities issued by central and state governments. The minimum investment in G-secs is 80% of total assets (across maturity). In this mutual fund scheme, there are two types, Gilt Fund and Gilt Fund with a 10-year constant duration. In Gilt fund with a 10-year constant duration, a minimum of 80% of total assets are invested towards government securities such that the Macaulay duration of the portfolio is equal to 10 years.

How do Gilt funds work?

Whenever the government requires money, they approach the 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 and 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. Risk-averse individuals 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 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 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%.

The following table depicts the top four Gilt funds based on three-year returns of different funds along with their AUMs: