What are Gilt Funds? Meaning, Benefits, and Returns

Published On: 14-Oct-2020

Mutual fund investments are subject to market risks.” This standard disclaimer for investing in mutual fund investments underlines the importance of managing the investment risks for the investors. When investing in debt funds, investors are primarily exposed to interest rate risk and credit risk. 


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The interest rate risk refers to the changes in portfolio valuation due to interest rate movements, and credit risk refers to the risk of default by the issuer entities. Different categories of mutual funds carry different investment mandates to invest in different kinds of securities and issuers, thereby exposing the investors to varying levels of investment risks. One such category of debt funds is Gilt funds. 

What is a Gilt Fund?

A Gilt fund is a type of debt fund that must have at least 80% of its net assets invested in government securities (G-Secs). While gilt funds invest in G-Secs across different maturities, the duration of such funds tends to be higher, as G-Secs are generally issued for longer tenors. For government securities (G-Secs) there is one more category of “Gilt Fund with 10-year constant duration”.

As such, investors are exposed to a reasonably high level of interest rate risk, as it is directly proportional to the Macaulay duration of the mutual fund scheme. The credit risk continues to be insignificant since the predominant portion of the investment portfolio is invested in sovereign securities. The fund may also diversify the investment portfolio by investing across securities issued by Central Govt. and different state governments. 

Advantages of Gilt Funds

The primary benefit of gilt funds is that such funds keep the investors insulated from credit risks. Further, one may reasonably expect a higher Yield-to-Maturity (YTM) for such funds, as the investment duration tends to be higher. 

Additionally, such funds also carry the potential to generate better returns when the interest rates are decreasing, as the interest rate movements coupled with high Macaulay duration push the portfolio valuations higher. Further, when the interest rates are expected to go higher, the fund managers may hedge the interest rate risk through suitable exposures and holding the long-term instruments until maturity.  

How to Invest in Gilt Funds?

While direct investing in Govt. securities may not be possible for retail investors, it is convenient to invest in gilt funds and enjoy similar investment exposure. One may invest in gilt funds online through the website/ mobile app of the mutual fund house or Registrar & Transfer Agent (R &TA).

Taxation of Gilt Funds

As per the provisions of the Income Tax Act 1961, mutual fund investment gains are taxed when the investments are redeemed, and the profits have been realised. Since gilt funds invest a predominant portion of its net assets in Govt. securities, they are classified as non-equity oriented mutual funds under the tax laws. 

The gains are classified as STCG if the holding period for such funds less than 36 months is and LTCG if investments are held for 36 months or more. STCG from non-equity oriented mutual funds is added to the regular income of the investor and taxed at the applicable rates. On the other hand, LTCG is taxed at 20% (plus applicable surcharge and cess) with indexation benefit. 

Note: The tax provisions, as mentioned in the article, are for illustrative purposes only, and are updated as per the Finance Act 2020. The tax rates for capital gains will be as per the tax laws applicable on the date of redemption/ sale and not on the date of investment.