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What are Gilt Funds? Know its Features, Risk & Returns Research Team | Posted On Thursday, December 12,2019, 04:09 PM

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What are Gilt Funds? Know its Features, Risk & Returns



With a variety of investment options, investors often find themselves in a dilemma to make the right investment choice. While investing in an investment instrument investors need to understand the key features, it's working and what it offers to make the right choice.

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What are Gilt Funds? Know its Features, Risk & Returns

Gilt funds can prove to be the right investment for risk-averse investors and help them diversify their portfolio. Gilt funds are an ideal blend of risk, returns and opportunity. Let’s take a look into how Gilt fund work:

 How do Gilt Funds work?

As we know the RBI performs many functions apart from being the central bank of the country. It acts as a regulatory body as well as performs the role of a banker to the government. So when the government needs to raise funds from the market it approaches the RBI. The RBI then lends money to the government after borrowing from other entities like insurance companies and banks.

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To raise money from investors the RBI issues government securities that have a fixed maturity. Since Gilt fund is a type of mutual fund that invests in medium and long-term government securities, the fund manager of gilt funds subscribes to these securities. Upon maturity, the investors are liable to receive an interest amount along with the invested capital.

Investors can take advantage of the Gilt funds as there is no capital risk which means capital protection is more or less guaranteed. Thus gilt fund proves to be a low-risk investment that provides moderate returns.

 Who should invest in Gilt Funds?

Gilt funds are mutual funds that mainly invest in medium and long-term government securities. Since Gilt fund invests in low-risk debt securities these are an ideal investment for investors looking for the security of their invested capital. Gilt funds differ from bond funds as bond funds mainly invest in corporate bonds, government securities, and money market instruments while Gilt funds invest in securities with high credit ratings such as G-secs. Therefore, gilt fund investments ensure that investors do not suffer capital risk while aiming for moderate returns.

Gild funds are also known to invest in better asset quality in comparison to equity funds or liquid funds. Thus, the gilt fund is one of the best options for investors looking for risk-free investments or aiming to invest in high-quality government securities.

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 Thinks to Consider Before Investing in Gilt Funds:

 -Risk Factor:

When compared to other investments, Gilt fund is the most liquid. This is because they do not carry credit risk. Since Gilt funds invest mainly in medium and long-term government funds thus it is almost sure that the government will try its best to fulfill its obligations within the given time.

The investor must be careful of interest rate regimes while investing in Gilt funds. Since the returns from gilt fund are inversely proportional to the interest rate, investors should refrain from investing in gilt fund during a rising interest rate regime.


Returns from Gilt funds are inversely dependent on the interest rates regimes. Thus when the interest rate falls, the price of the G-sec increases thus benefitting the performance of the gilt funds and vice versa. Gilt funds also perform well when the economy is facing a slump or when the equity market is not performing well.

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Investors of gilt funds must bear charges like the fund manager’s fee and other related expenses. So investors will have to pay an annual fee which is the fund’s expense ratio. The SEBI has specified an upper limit of 2.25% for debt funds.


Since these mutual funds are known to invest in medium and long-term government securities their average maturity period varies from 3 years to 5 years. Thus if you are looking for risk-free investment for a period of 3-5 years then you may opt for Gilt fund investment.

 -Financial Goals:

Gilt fund can be ideal for fulfilling your medium-term financial requirements as they offer reasonable returns and high security. Thus if you are entering the market during a falling interest rate regime, then long-term Gilt funds are best for you.  Equity investors may also invest in Gilt fund when the overall capital markets are going downwards. At such times Gilt fund are ideal to park money for short-tenure.

 -Tax on Gains

The gains from the gilt funds are taxable like other investment options. You have to pay taxes based on the holding period of your Gilt fund investments. Funds held for less than 1 year will be taxed as per STCG and funds held for 1 year or more will be taxed as per LTCG. The income from such investments is added to your annual income and is taxed accordingly. However, no securities transaction tax is applicable on Gilt funds.

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