Gilt funds are a type of mutual fund that invests in government securities such as central government bonds or state government bonds. As gilt funds invest in government securities, there are hardly any default risks in these funds.
For investors, equity investment has been risky this year with huge volatility, especially for those who had a short term outlook. Hence, industry experts never suggest investing in equity mutual funds with a short term investment horizon. Additionally, experts say investors can look at gilt funds as one of their best options, especially for short-term investment horizon.
These types of mutual funds invest in government securities such as central government bonds or state government bonds. As gilt funds invest in government securities, there are hardly any default risks in these funds.
Gilt funds come with various tenures – both long-term and short-term investments. The tenure for long term gilt funds ranges from 5 to 30 years, while short-term funds mature in less than 3 years. Long-term gilt funds invest in government bonds, whereas the short-term funds invest in short-term government securities, and in long term government bonds. The longer-tenure gilt funds are inclined towards interest rate fluctuations and are considered riskier than the short-term ones.
Here are some advantages and disadvantages of investing in gilt funds that investors should keep in mind;
Even though short-term gilt funds offer risk-free moderate returns, the long-tenure funds are more inclined towards interest rate fluctuations and changes in the economy. For instance, even a slight increase in the basis points in interest rates could affect long-term gilt fund returns drastically. Hence, experts say gilt funds are the best option for investors who are looking for long-term investments.
There are management fees charged on gilt funds, however, they are lower as compared to other debt funds. Experts say investors should keep in mind that fund managers cannot charge more than 2.25 per cent as management fees from investors as SEBI has caped fund management charges on debt funds at 2.25 per cent.
Gilt fund returns are taxed similarly to debt mutual funds. Short-term gains from gilt funds are taxed as per the income tax slab of the taxpayer, and for investments with more than 3-year tenure, the returns are taxed at 20 per cent post indexation.