Gilt funds – features, risk & returns

Gilt funds are a specific kind of debt fund, where your money is invested in central government loans, government securities and state development loans for medium to long tenures. Since these are fixed income mutual funds, investors would be able to rake in regular earnings on their investments, even though the returns may vary.

Features of gilt funds

Now that you know what is gilt funds, here is a look at the features of such schemes.

• Gilt funds are controlled by the Reserve Bank of India.
• The lower risk involved with gilt funds make it an ideal investment instrument for risk-averse
• The returns are lower than from similar investment in equities.
• Gilt funds have a maturity range between 3 to 5 years after the initial investment.
• Gilt funds are best suited to people who want to accumulate wealth over a moderate duration. However, if you are looking for great returns in a matter of a couple of years, you should consider other investment options.
• The returns from gilt funds are taxable. The exact amount of tax depends on the tenure of the investment. For instance, if you invest for less than three years, your income is known as short-term capital gains (STCG). While investing for more than 3 years and earning returns is classified as long-term capital gains (LTCG).

The risk involved with gilt funds

A common misconception among investors is that gilt funds are completely risk-free. While it is true that these schemes have a lower risk profile than many other investments, they are, by no means, completely secure. The government securities are free from any risk, but the price of the units may vary, leading to ever-changing net asset value (NAV).

However, it is important to understand that gilt funds are still much safer than investing in equities. In the short-term, investors may get negative returns due to the constantly changing NAVs for the securities. However, unlike equity funds, investors can rest easy knowing that they would at least get the principal sum back, in case of gilt funds.

Returns from gilt funds

Investors can get up to 12% returns from a gilt funds investment. However, there is no guarantee regarding the returns due to the highly variable characteristic of the rates. Investors would do well to invest in gilt funds when the interest rates are declining. In fact, when all other investments are performing poorly due to disturbances in the market, you should invest in gilt funds to rake in better returns.

Keep these pointers in mind if you are looking to invest in gilt funds and increase your overall wealth.