Gilt funds invest in government securities, offering low risk of non-payment, but susceptible to interest rate changes due to longer government borrowing.
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Gilt Mutual Funds in India: Overview
Gilt Funds in India are the type of mutual fund which exclusively invests in government securities, making them a choice for risk-averse investors seeking the security of government bonds. These funds, focused solely on government bonds, offer protection against credit risk.
When the State or Central Government requires funds, it approaches the country’s apex bank, The Reserve Bank of India (RBI), which also functions as the Government’s banker. The RBI gathers the necessary funds from banks and insurance organisations and then lends them to the state or central governments. In return, the Reserve Bank of India issues government securities, known as g-secs, with fixed tenures. Gilt Funds subscribe to these securities. Upon the maturity of the security, the fund returns it and receives a payout.
For conservative investors, Gilt Funds present an ideal blend of reasonable returns and minimal risks. It’s crucial to note that Gilt Funds are influenced by fluctuations in interest rates. Unlike bond funds that may diversify into corporate bonds, Gilt Funds focus solely on g-secs or government securities. This specialisation makes Gilt Mutual Funds low-risk investments, offering reasonable returns and capital preservation. Consequently, they serve as a suitable investment option for individuals with lower risk tolerance seeking opportunities in government securities.
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Did You Know? Investors are showing interest in mutual funds’ government securities schemes. According to AMFI, gilt funds received ₹ 396 crore in June, reversing the ₹ 127 crore outflow from the previous month. |
List of Gilt Mutual Funds in India
These are the best Gilt Mutual Funds in India, and you can refer to them as given below in the table.
| Fund House | Fund Name | Fund Size (₹ Crs) | Return (p.a) |
| ICICI Prudential | ICICI Prudential Gilt Fund | ₹4,143 | +7.22% |
| SBI | SBI Magnum Gilt Fund | ₹7,268 | +6.75% |
| Kotak | Kotak Gilt Investment Fund | ₹2,709 | +6.46% |
| DSP | DSP Government Securities Fund | ₹582 | +6.22% |
| Edelweiss | Edelweiss Government Securities Fund | ₹135 | +6.13% |
| Axis | Axis Gilt Fund | ₹213 | +5.91% |
| Aditya Birla SL | Aditya Birla Sun Life Government Securities Fund | ₹1,460 | +5.88% |
| Nippon India | Nippon India Gilt Securities Fund | ₹1,405 | +5.80% |
| PGIM India | PGIM India Gilt Fund | ₹129 | +5.68% |
| Bandhan | Bandhan GSF Investment Fund | ₹1,429 | +5.62% |
| Tata | Tata Gilt Securities Fund | ₹304 | +5.37% |
| UTI | UTI Gilt Fund | ₹538 | +5.32% |
| Canara Robeco | Canara Robeco Gilt Fund | ₹95 | +5.25% |
| HSBC | HSBC Gilt Fund | ₹215 | +5.24% |
| HDFC | HDFC Gilt Fund | ₹2,081 | +5.20% |
| Invesco | Invesco India Gilt Fund | ₹22 | +4.84% |
| Franklin Templeton | Franklin India Government Securities Fund | ₹130 | +4.70% |
| Quant | Quant Gilt Fund (Unranked) | ₹61 | N.A. |
| Union | Union Gilt Fund (Unranked) | ₹121 | N.A. |
Who Should Invest in Gilt Funds?
Preference of Risk-Averse Investors
Investors with a low-risk tolerance often prefer gilt funds, especially for a short- to medium-term investment horizon.
Diversification and Stability in Portfolio
Gilt funds serve as an excellent choice to enhance diversity and stability in an existing mutual fund portfolio, particularly if it has a stronger inclination towards equity.
Moderate Returns with No Risk
While gilt funds may offer returns lower than top-performing equity funds, they are still considered acceptable, and importantly, involve minimal risk.
Vulnerability to Interest Rate Changes
The primary threat to gilt funds lies in the fluctuations of interest rates. An increase in the repo rate by the RBI can significantly reduce returns.
Consideration of Liquidity Challenges
Gilt funds are often deemed as highly illiquid investments. This implies that investors may face difficulties in swiftly exiting their positions and liquidating their capital in case of an emergency.
These are the features and if investors are okay with the above features of Gilt funds, they can invest in them.
Factors to Consider while Investing in Gilt Mutual Funds
Risks in Gilt Funds
Gilt Funds distinguish themselves by carrying no credit risk since they are issued by the government, which historically has never defaulted on its payments. However, it’s essential to be aware of the inherent risk associated with changing interest rates. In the event of a sharp rise in interest rates, the Net Asset Value (NAV) of a Gilt Fund can experience a significant decline, impacting the fund’s overall performance.
Returns from Gilt Funds
The returns from Gilt Funds are intricately linked to fluctuations in interest rates, and as such, they cannot be guaranteed. However, in a scenario of falling interest rates, Gilt Funds have the potential to deliver impressive returns, reaching up to 12%. Additionally, during economic downturns, Gilt Funds may outperform equity funds, providing investors with an alternative avenue for favourable returns.
Expense Ratio Considerations
Similar to other mutual funds, Gilt Funds come with an expense ratio, representing the fee charged for fund management services. This ratio is a percentage of the fund’s total assets and can vary based on the investment strategy employed by the fund manager. Investors are advised to seek out Gilt Funds with lower expense ratios to maximise potential gains and optimise their overall investment portfolio.
Strategic Investment Planning
Given that the average maturity period of a Gilt Mutual Fund typically falls between three and five years, prospective investors should align their investment horizon accordingly. These funds are well-suited for those with a medium-term wealth generation objective. Moreover, if interest rates are on a downward trajectory, investors may witness favourable returns even in the short term. Crafting a well-thought-out investment plan that considers these factors is crucial for optimising the benefits of Gilt Funds.
Elaboration on Risks
While Gilt Funds eliminate credit risk by being government-issued, they introduce an interest rate risk. This means that the Net Asset Value (NAV) of the fund is susceptible to sharp declines if interest rates surge unexpectedly. It underscores the importance of investors closely monitoring economic indicators and interest rate trends when considering Gilt Funds as part of their investment strategy.
Insights into Returns
Understanding that Gilt Fund returns hinge on interest rate movements emphasises the dynamic nature of these investments. In periods of declining interest rates, Gilt Funds emerge as potential powerhouses, delivering returns that could rival or even surpass those of equity funds. This flexibility provides investors with a versatile tool to navigate different economic scenarios and optimise returns based on market conditions.
Expense Ratio Impact
The expense ratio, as a critical metric, directly influences the cost-effectiveness of investing in Gilt Funds. Choosing funds with lower expense ratios becomes pivotal, allowing investors to retain a larger share of their returns. This decision-making aspect underscores the need for a thorough assessment of the fund manager’s strategy and associated costs.
Investment Horizon Insights
The maturity period of Gilt Mutual Funds, typically ranging from three to five years, aligns with a medium-term investment horizon. This characteristic positions Gilt Funds as valuable tools for wealth creation over a focused time frame. Notably, during periods of declining interest rates, investors might witness lucrative returns within a shorter duration, further highlighting the importance of strategic investment planning.
Risks Involved While Investing in Gilt Mutual Funds
There are several risks associated with investing in Gilt Mutual Funds in India. Here are a few:
Interest Rate Risk
Gilt Mutual Funds are highly sensitive to changes in interest rates. If interest rates in the economy rise unexpectedly, the Net Asset Value (NAV) of Gilt Funds can experience a significant decline. This risk is inherent due to the nature of the securities held in the fund, which are government bonds with fixed interest rates.
Market Fluctuations
Like any investment, Gilt Mutual Funds are susceptible to market fluctuations. While they carry low credit risk as they are government-backed, changes in market sentiment, economic conditions, or geopolitical events can impact the fund’s performance.
Inflation Risk
Gilt Mutual Funds may be vulnerable to inflation risk. In periods of high inflation, the real returns (returns adjusted for inflation) from these funds may not keep pace with the rising cost of living, potentially eroding the purchasing power of the investment.
Liquidity Risk
Gilt Funds might face liquidity risk, especially in the case of sudden redemptions by a large number of investors. If the fund manager is forced to sell securities in a market with low liquidity, it may impact the NAV and lead to suboptimal returns for investors.
Credit Risk (Indirect)
While Gilt Funds themselves do not carry credit risk as they primarily invest in government securities, there can be an indirect credit risk. This arises if the government’s fiscal health is compromised, leading to concerns about its ability to honour its debt obligations.
Reinvestment Risk
Gilt Mutual Funds face reinvestment risk, particularly when interest rates are falling. As existing bonds mature, the fund manager may need to reinvest the proceeds in new bonds with lower interest rates, potentially impacting overall returns.
Regulatory Changes
Changes in regulatory policies or government regulations can impact the performance of Gilt Mutual Funds. Alterations in taxation policies or investment guidelines may affect the fund’s strategy and returns.
Currency Risk (for International Gilt Funds)
In the case of international Gilt Funds, currency risk comes into play. Fluctuations in exchange rates can impact the returns for investors when converting foreign currency returns to their domestic currency.
Operational and Managerial Risks
Every mutual fund is exposed to operational and managerial risks. These include risks related to the fund management team, operational processes, and unforeseen events that may affect the fund’s day-to-day operations.
Advantages of Gilt mutual fund
Reasonable Returns
Gilt Mutual Funds offer reasonable returns, making them an attractive investment option for investors seeking a balance between safety and returns. While the returns may not be as high as those from riskier investment avenues like equity funds, they provide a more stable and predictable source of income.
Zero Default Risk
One of the significant advantages of Gilt Mutual Funds is that they carry zero default risk. This is because these funds primarily invest in government securities, and historically, governments rarely default on their payments. The backing of the government adds a layer of safety to the investment, assuring investors that their principal amount is secure.
Low-Risk Investments
Gilt funds are considered low-risk investments, particularly when compared to higher-risk options such as equity funds. The low-risk profile is attributed to the government-backed nature of the securities in which these funds invest. This makes Gilt Mutual Funds suitable for conservative investors or those looking to preserve capital while still earning returns.
Diversification from Equity Funds
Gilt Mutual Funds offers an excellent diversification option for investors with a portfolio dominated by equity funds. Adding Gilt Funds to a portfolio helps balance the risk-reward profile, especially during market uncertainties. The inverse relationship between interest rates and bond prices further enhances the diversification benefits.
Stability in Economic Downturns
Gilt funds have demonstrated stability and resilience during economic downturns. In times of economic stress, when other asset classes may experience volatility, Gilt Mutual Funds can provide a safe haven for investors. The reliable returns and low default risk make them an attractive option during periods of economic uncertainty.
Ideal for Risk-Averse Investors
The low-risk nature of Gilt Mutual Funds makes them ideal for risk-averse investors who prioritise the preservation of capital over higher but riskier returns. These funds provide a relatively stable investment environment, allowing investors to navigate market uncertainties with greater confidence.
Diversified Investment Options:
Gilt funds offer diversified investment options within the fixed-income space. Investors can choose from a variety of government securities with different maturities and yields, allowing for a tailored investment approach based on individual financial goals and risk tolerance.
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Conclusion
Gilt Mutual Funds presents a compelling investment option, characterised by several advantages that cater to a diverse range of investor preferences and financial goals. The combination of reasonable returns, zero default risk, and low-risk attributes positions Gilt Funds as an attractive avenue for those seeking stability and capital preservation.
The unique feature of Gilt Mutual Funds lies in their government-backed nature, ensuring zero default risk. This distinctive advantage provides investors with a sense of security, particularly crucial in uncertain economic climates. For any queries, contact our experts at Vakilsearch.
FAQs on Gilt Mutual Funds in India
In mutual funds, gilt refers to government securities or bonds issued by the government. Gilt funds primarily invest in these government-backed instruments, providing investors with a low-risk investment option.
ICICI Prudential Gilt Fund, SBI Magnum Gilt Fund, and more are some of the best gilt funds.
Gilt Funds, a type of mutual fund, come in two varieties – long-term and short-term securities. They are generally considered safe, but the returns are relatively low compared to other investment options.
If someone wants to invest a small amount in various government securities, they can think about choosing Gilt funds. Gilt funds are a great option for investing with a minimum amount.
Gilt funds offer the potential for higher returns but come with market risks. FDs provide capital preservation and fixed returns, making them low-risk but potentially offering lower returns. The choice depends on individual risk tolerance and financial goals.
Determining the best gilt fund depends on individual preferences. Some well-regarded gilt funds in India include SBI Magnum Gilt Fund, IDFC Government Securities Fund, and HDFC Gilt Fund.
Disadvantages of gilt funds include interest rate risk, market fluctuations impacting Net Asset Value (NAV), and potential for lower returns compared to riskier investments.
If you sell Gilt fund units within 36 months, the profits are considered Short-Term Capital Gains (STCG) for tax purposes. These gains are then taxed at the investor's applicable income tax rate.
The returns from a Gilt Fund are not guaranteed because they depend on changes in interest rates. However, when interest rates are falling, Gilt Funds have the potential to provide returns of up to 12%.
Gilt Funds are safe from the risk of the government defaulting on payments since they are issued by the government. What is a gilt in mutual funds?
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