Different investors have different risk appetites. Some are willing to go all-in, hoping for high returns, while others prefer to play it safe and receive an assured return instead. Some fall in between. There are numerous low-risk investment products, with debt funds being one of the top choices. For investors who find themselves in the middle of the risk graph, gilt funds that invest primarily in government-issued securities are a good option to consider. They carry nearly zero default risk because of the exposure to government securities. However, they do carry interest rate risk.
Gilt funds are medium-risk debt funds that provide reasonable returns. Glit funds are mutual funds that must invest at least 80% of their assets in government securities. That means central, and state government securities that may be used to fund infrastructure projects, developmental projects and other similar avenues find a place in gilt funds. Since they are made up of government securities, they enjoy sovereign protection and carry no credit risk. The only threat to your investment could be from a sudden hike in interest rates. If there is any increase in interest rate in the economy, the NAV of the gilt fund can face sharp decline as the price of bonds are inversely proportional to yields. That happens if the inflation in an economy soar. A rising inflation rate is effectively an enemy of gilt funds.
Benefits of investing in gilt funds
• Debt mutual funds, though low-risk, still carry a certain amount of risk through exposure to securities such as corporate bonds. Unlike them, gilt funds have almost zero default risk because of the sovereign protection they enjoy. However, you need to be wary of interest rate risks when it comes to gilt funds. Volatility in interest rates will impact the return on investment.
• Historically, gilt funds have provided positive returns to investors over the past 10 years. Going by this, it can be reasonable to expect that this trend will continue, provided there are no major fluctuations in interest rates.
• Gilt funds are also an excellent way to diversify your portfolio, even if you are not a risk-averse investor. If most of your mutual fund investments are skewed towards equity funds, then adding some gilt fund investment can balance out your portfolio.
Taxation of gilt funds
Returns from investments in gilt funds are taxable. A short term capital gains in these schemes are taxed as per the applicable tax rate of the investor, if the investment is sold within 3 years.
For gains you make for an investment horizon of over three years, long-term capital gains tax of 20% after providing indexation will be levied on the returns.
Gilt funds are suitable investment options for moderate to high risk-taking investors. Gilt funds can be a good way to diversify your portfolio. Speak to expert financial advisors from Geojit to discover how gilt funds can fit into your portfolio.