Gilt Mutual Funds

• Investors can have two major investment objectives - capital appreciation and capital preservation. While capital appreciation comes with high risks, capital preservation comes with relatively lower risks. Gilt mutual funds are suitable options for those looking for capital preservation.
• Gilt funds are a type of debt fund that is considered to have the lowest risk among other mutual funds. This is because they only invest in bonds and fixed-interest securities issued by the Central and State Governments. The underlying securities have varying interest/coupon rates and maturities. As per the Securities and Exchange Board of India (SEBI) mandate, gilt mutual funds have to invest at least 80% of their pooled money in government securities, while the remaining can be invested in other types of bonds.

1. Conservative investors: Gilt funds are ideal for investors with a very low-risk tolerance because they don’t invest in high-risk investments like corporate bonds or stocks but only in government securities (G-secs).
2. Investors looking for capital preservation and moderate returns: These are probably the best funds for investors whose only investment objective is the safety of their capital while earning moderate returns.
3. Investors looking for short-to-long periods: Gilt mutual funds come in short- to medium-term and long-term variants. Therefore, investors can park their funds in a gilt fund in line with their preferred investment horizon.
4. Investors looking for portfolio diversification: Those looking to diversify their portfolios by adding low-risk investments can invest in gilt funds.
5. Investors looking for actively managed funds: Those looking to earn somewhat stable returns in the market but don’t have the time or knowledge to do so can opt for gilt funds, as the portfolio manager actively manages the funds on their behalf.
6. Investors looking for assured returns during market downturns: Since gilt funds are known to perform well during a falling interest rate regime, investors looking to earn stable returns in a market downturn can consider these.
7. High-income bracket investors: Gilt funds are more tax-efficient than fixed deposits in terms of taxation when it comes to investors falling in the higher-income bracket.

1. Market volatility: Since gilt funds are required to invest at least 80% of the fund in G-secs and lack in equity exposure, they are free from the impacts of market volatility.
2. Interest rate regime: Although these funds are free from market risks, they are prone to the risks of changing interest rates. The NAV of a gilt fund is inversely proportional to rising interest rates. Gilt funds are known to offer better returns when the interest rates are on a falling spree than when they are rising.
3. Returns: Gilt fund returns are not guaranteed as they depend on interest rate changes, which is noteworthy as the government typically borrows for a longer duration. However, they can offer 10-15% returns in a falling interest rate regime.
4. Expense ratio: As with all other mutual funds, gilt funds also charge a fee called expense ratio towards fund management. This fee is charged annually, decreasing your returns to that extent.
5. Maturity: Gilt funds come with short-to-medium and long investment horizons. You can choose to invest in a fund with a suitable maturity.

Capital gains earned from gilt mutual funds attracts taxes depending on the holding period:

1. Returns from gilt fund units held for less than 3 years are treated as short-term capital gains. These are added to your annual income and taxed as per your income tax slab.
2. Whereas returns on units held for more than 3 years qualify as long-term capital gains and are taxed at 20% with indexation.

When an investor earns dividends on their gilt mutual fund, the dividends are considered as a part of their taxable income and are subject to taxation at the applicable rate based on their income tax bracket. Also, there is a 10% TDS on the dividend amount if it exceeds Rs. 5000 in a financial year.

1. Interest rate risk: Although gilt funds are devoid of credit and market risks, these are sensitive to the risk of changes in the interest rate. Generally, gilt funds tend to perform better in a falling interest rate regime than in a rising trend. Given that the government borrows for longer periods, the changes in interest rates impact the performance of these funds.
2. Inflation risk: For the same reasons that government securities have a longer maturity period, gilt funds may not offer inflation-adjusted returns.
3. Illiquidity: Gilt funds have a pre-fixed lock-in period, which makes them highly illiquid. Investors cannot exit these funds as per their wish. However, there are gilt funds with no lock-in period as well.
4. Lower returns: As gilt funds are low-risk, they offer lower returns than equity and hybrid mutual funds. Further, returns also fluctuate in line with the changes in the repo rate.
5. Incorrect entry and exit timing: Knowing when to enter and exit gilt funds is the key to earning profits. As a rule of thumb, these funds generate better returns during recessions. Therefore, entering such funds during a market boom may not be favourable.

1. Low to no credit risk: Since gilt funds invest majorly in government securities, the associated credit risk is almost nil as the government rarely defaults on repayment. This means your returns are close to stable.
2. No market risk: Compared to equity and hybrid funds, gilt funds have significantly lower risks as they don’t have equity exposure.
3. Moderate but almost stable returns: As the risk-reward rule goes, gilt funds offer relatively lower returns for low risk. However, their returns are mostly higher than most fixed-income investments like Fixed Deposits (FD) and Recurring Deposits (RD).
4. Access to exclusive G-Secs: Not all government securities are accessible for retail investors; some are only available for institutional fund houses. However, you can invest in such exclusive securities by investing in gilt funds.
5. Tax-efficient for high-income earners: For conservative investors falling under the higher-income bracket, gilt funds are more tax-efficient than fixed deposits.

• This short- and mid-term fund has an AUM of Rs. 1409.88 crore. The fund tracks the CRISIL Dynamic Gilt Index and has an expense ratio of 0.62%. Bandhan G-Sec-Invest fund comes with no exit load or lock-in period. 98.17% of its assets are invested in sovereign debt holdings.

• This is also a short and mid-term gilt fund. Having an AUM of Rs. 420.94 crore, this fund carries an expense ratio of 0.54%. It aims to replicate the performance of the CRISIL Dynamic Gilt Index. DSP G-Sec Fund has a sovereign debt holding of 68.89%. It has no lock-in period and exit load.

• Having an AUM of Rs. 119.69 crore, Edelweiss Government Securities Fund is a short and mid-term gilt fund. It has an expense ratio of 0.66% and 0 exit load and lock-in period. The fund tracks the Nifty All Duration G-Sec Index and has an 84.11% sovereign debt holding.

• This long-term gilt fund has an AUM of Rs. 563.25 crore. The fund’s expense ratio is 0.23%. It has no exit load and lock-in period. The fund invests 96.94% of its assets in sovereign debt holdings. ICICI Pru Constant Maturity Gilt Fund tracks Crisil 10 Yr Gilt Index.

• Having an AUM of Rs. 214.03 crore, Bandhan G-Sec-Constant Maturity Plan is a long-term gilt fund. Sovereign debt holdings make up 99.10% of its assets. It has an expense ratio of 0.49%. The fund tracks Crisil 10 Yr Gilt Index. It has no exit load and lock-in period.