Gilt Funds

Risk factor: Unlike corporate bond funds, gilt funds are the most liquid instruments as they don’t carry credit risk. The reason being the government will always try its best in fulfilling its obligations. The net asset value (NAV) of the fund drops sharply during times of an increasing interest rate regime.

Returns: Gilt funds are capable of generating returns as high as 12%. However, returns from gilt funds are not guaranteed and highly variable with the changes in the overall interest rates. Hence, it would be beneficial to invest in Gilt funds when the interest rates are falling. However, gilt funds are still expected to deliver higher returns than even equity funds.

Cost: Gilt funds charge an annual fee known as expense ratio, which takes care of the fund manager’s fee and other related expenses. This is a percentage of fund’s average asset under management. As per SEBI specifications, the upper limit of expense ratio for debt funds is 2.25%. For instance, dynamic approach means to buy and sell securities as per the changes in the interest rate.

Investment Horizon: Gilt funds invest in government securities, which have medium to long-term maturity periods. If you are thinking of investing in gilt funds, then you need to have an investment horizon of at least three to five years.

Financial Goals: If wealth accumulation over a medium-term is your goal, then you may consider investing in gilt funds to ride on the interest rate volatility. However, if you are looking for safer havens to earn short-term returns, then gilt funds could be the right choice.

Tax on Gains: Capital gains from your gilt fund are taxable. The rate of taxation is based on your holding period, i.e. how long you stay invested in a gilt fund. A capital gain made during less than three years is known as the short-term capital gain (STCG). However, a capital gain made over three years or more is known as the long-term capital gains (LTCG).