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Gilt Mutual Funds

While investing, one of the most significant decisions that an investor has to make is determining how much risk he is willing to take with his investment. Should he opt for aggressive growth or capital preservation? Usually, investors with a lower risk tolerance turn towards debt funds for capital preservation. Debt funds come in different types. Of these, Gilt funds are considered to have the lowest risk.

Here, we will explore Gilt Mutual Funds and talk about everything that you need to know about them before investing.

List of Gilt Mutual Funds

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What are Gilt Funds?

Gilt Funds are debt funds that only invest in bonds and fixed interest-bearing securities issued by the state and central governments. These investments are made in instruments having varying maturities. Since the money is invested with the Government, these funds are said to carry minimal risk.

Features of Gilt Funds

The main features of Gilt debt funds are:

  • Comparatively Secure

Since government assets back these funds, the risk of losing your investment is quite minimal. Typically, the Government never fails to meet its obligations under the loans it gets from the RBI.

  • No Lock-In

These funds typically do not have a lock-in period during which the investor is not permitted to withdraw funds in whole or in part. However, one must confirm the lock-in term before investing in a certain gilt fund.

How Does Gilt Mutual Funds Work?

Whenever the State or Central Government requires funds, it asks the apex bank of the country - The Reserve Bank of India (RBI) - which is also the Government's banker. RBI collects the required funds from banks and insurance organizations and lends them to the state/central governments. In exchange, the Reserve Bank of India issues g-secs or government securities with a fixed tenure.

Gilt Funds subscribe to these securities. Once the security matures, the fund returns it and receives a payout.

For most conservative investors, such funds are often found to be a good combination of reasonable returns and minimal risks. However, it is important to note that Gilt Funds are affected by the changes in interest rates.

How Should You Invest in a Gilt Mutual Fund

You can invest in Gilt mutual funds through any particular AMC’s portal, or you can consider investing via the Groww application, too.

All that you would have to do is download the application, sign up, complete the KYC process and start investing.

Why Should You Invest in Gilt Funds?

Unlike bond funds, which may invest in corporate bonds, Gilt Funds solely invest in g-secs or government securities. This makes Gilt Mutual Funds low-risk investments that offer reasonable returns along with capital preservation. Hence, they are a good investment option for people with lower risk tolerance and seeking investment opportunities in government securities.

Taxation Rules of Gilt Funds

The taxability of these funds varies according to the term of investment holdings:

If the units are redeemed within a 36-month period, the returns from such funds are taxed as Short-Term Capital Gains (STCG). These gains are taxed at the investor's marginal tax rate.

If the units are redeemed after the initial 36-month holding period, the returns are considered Long Term Capital Gains (LTCG) for tax reasons. Long-term capital gains on returns on gilt fund units will be taxed at the investor's applicable income tax bracket.

FAQ

Q1. What is gilt mutual funds meaning?

Gilt funds are a debt mutual fund that invests almost entirely in government bonds, sometimes known as G-Secs. G-secs, or Government securities, are sovereign papers issued by the Government of India. Therefore, investors have less credit risk on the principal amount deposited.

Q2. What is the risk of gilt debt funds?

They are susceptible to the changes in interest rates. A substantial hike in interest rates could influence the returns earned by these schemes.

Q3. Who should invest in Gilt funds?

These funds are suitable for Risk-Averse Investors, diversification-seeking investors, and Investments with a horizon of 3 to 5 years.

Q4. Is investing in Gilt funds safe? 

Gilt mutual funds are considered safe because they invest in government-issued securities.

Q5. Is it time to invest in gilt funds?

Usually, people prefer investing in gilt funds during periods of economic unpredictability or stock market volatility since they are less risky. 

Disclaimer - Mutual Fund investments are subject to market risks; read all scheme-related documents carefully.

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