Features of Gilt Funds

A gilt fund is a type of mutual fund. An investor invests his money in it intending to get better returns upon maturity. Unlike equity funds which carry a high risk, gilt funds are a safe investment option. Gilt funds are one of the oldest methods of investing money. The Reserve Bank of India (RBI) lends money to the government as and when required. In exchange, it issues government securities, and gilt fund managers invest money in these securities. Upon maturity, the fund receives money in exchange for government securities. Now let us look at gilt fund meaning in detail.

Gilt Fund Meaning 

Mutual funds are primarily classified into equity funds and debt funds. Equity funds invest in equity stocks and are highly dependent on market fluctuations. Hence, do not provide a steady fixed income. A gilt fund is one type of debt mutual fund which does not invest in equity stocks. According to SEBI norms, 80% of assets of gilt funds must be invested in government securities. The Remaining 20% can be invested in other debt options. As gilt funds primarily invest in government securities, it involves minimal risk. It is a good option for investors with a low-risk appetite. 

Gilt funds provide returns to investors through the interest generated upon investing in securities. Hence, the performance of a gilt fund is highly dependent on existing interest rates. When the interest rate falls, the Net Asset Value (NAV) of gilt funds starts increasing. And when the interest rates rise, the NAV of gilt funds decreases. Therefore, the best time to invest money in gilt funds is during the falling interest rate regimen. Now that you know about gilt funds, let us look at its features.

Features of Gilt Funds

Here are the features of gilt funds which every investor must be aware of –

1. Gilt funds can be of two types. The fund manager invests money in government securities of various maturity periods in the first type. In the second type, the fund manager invests money in government securities with the same maturity period.
2. An investor can choose to invest a lump sum amount in a gilt fund or start a SIP for systematic investment over a longer duration of time.
3. The risk of losing your investment is very low in gilt funds as these are backed by government securities. Usually, the government never fails to fulfil its obligations towards the loans it receives through RBI.
4. Gilt funds usually do not have a lock-in period when the investor is prohibited from withdrawing funds either partially or wholly. One must, however, confirm the lock-in period before investing in a particular gilt fund.
5. Gilt funds are highly affected by fluctuations in interest rates. When interest rates start increasing, the net asset value of these funds decreases substantially and vice versa.
6. Investors must pay a fee annually, which includes the fund manager’s fee and some extra costs. These costs must be kept in mind by an investor for selecting a gilt mutual fund.
7. The monetary gains obtained by a gilt fund are taxable. If the capital gain is made within three years, the investor must pay a short-term capital gains tax. If the gain is made after investing for more than three years, the investor is liable to pay long-term capital gains tax. 
8. As most government securities are not easily available to invest in for retail and individual investors, gilt funds are a great option to do the same via fund houses.

Who Should Invest in a Gilt Fund?

A gilt fund is a viable option for people looking for safe investment avenues to meet their financial goals. Gilt funds invest most of their assets in low-risk government securities, ensuring that the capital invested is not put at risk. Therefore, investors who are not willing to risk their capital and are happy with moderate returns on investment are good candidates to invest in a gilt fund. Investors can choose from the best gilt funds available and make investments accordingly.

Conclusion:

Having an idea of the gilt fund’s meaning and its features is extremely important for an investor. Investing in gilt funds may seem easy, but one has to be smart enough to regularly track the markets and interest rates to make a timely exit in case the fund starts showing negative growth. Gilt funds, however, prove to be a good choice to add diversity and stability to an investor’s portfolio. A horizon of 3 to 5 years is the best to achieve reasonable returns through guilt funds. For investors looking to keep their principal amount safe, gilt funds are the way to go.