Gilt Mutual Funds

Gilt funds are a category of debt mutual funds that invest at least 80% of their total assets in government securities across different maturities. The securities may include dated G-Secs, Treasury Bills and State Development Loans (SDLs). Since the government is the borrower, the credit/default risk is relatively low. 

However, gilt fund prices can still fluctuate as they are exposed to interest rate risk. Government bonds are traded in the market and their prices generally move inversely to their yields. When interest rates rise, bond yields generally increase, causing the prices of existing bonds to fall. This can reduce the NAV (Net Asset Value) of gilt funds. 

Conversely, when interest rates fall, bond yields generally decline, which can push bond prices higher and potentially benefit gilt fund returns. Therefore, the low credit risk associated with government securities does not mean gilt funds are risk-free.

Security and Exchange Board of India (SEBI) has classified gilt funds into two types: 

1. Gilt Fund: These funds invest at least 80% of their total assets in government securities across different maturities. They primarily carry interest-rate risk rather than credit risk. These gilt funds can shift along the maturity curve based on the fund manager’s view.

2. Gilt Fund with 10-year Constant Duration: These funds invest at least 80% of their total assets in government securities and maintain a Macaulay duration of 10 years. Their longer duration makes their NAV more sensitive to movements in the interest rates and makes them more cyclical. As a result, their returns may fluctuate more when interest rates rise or fall.

Since the G-Sec market is largely dominated by institutional investors, gilt mutual funds provide retail investors an easier way to gain exposure to a diversified portfolio of government securities with a relatively small investment. Here’s how they work:

• Government issues securities: The government borrows money by issuing Government Securities (G-Secs) like sovereign bonds and Treasury Bills (T-Bills). These securities have a specified maturity and interest/payment structure. 
• Fund manager invests the corpus: Money from multiple investors is pooled and invested primarily in government securities of different maturities, in line with the fund’s investment objective. The fund manager may buy, sell or hold securities based on market conditions and the scheme's strategy.  
• Fund earns interest and capital gains/losses: The securities generate interest income. The fund can also earn gains or incur losses as the market value of its securities changes, especially when interest rates change.  
• YTM indicates portfolio yield: Yield to Maturity (YTM) indicates the annualised yield of the fund's debt portfolio based on its current market value and assuming the securities are held until maturity, subject to certain assumptions. YTM is not the same as the fund's guaranteed return. 
• Interest rates affect returns: Bond prices generally move inversely to interest rates. When interest rates fall, bond prices tend to rise, potentially increasing the fund's NAV. When interest rates rise, bond prices tend to fall, which can negatively affect the NAV.

Note: Gilt funds have very low credit/default risk because they invest in government securities, However they are not risk-free or guaranteed-return investments.

You can start investing in gilt mutual funds through the Paisabazaar app by following the simple steps below:

• Open your Paisabazaar app.
• Tap on ‘Mutual Funds’ on your mobile homescreen. 
• Start exploring gilt mutual funds by clicking on ‘10-year Government Bond’. 
• Select one gilt mutual fund based on your returns and risk appetite. 
• Complete your KYC to start investing in gilt funds. 

Tax calculation on gilt funds depends on your date of investment and whether you receive capital gains or dividends.

Capital Gains

• Investment made on after 1 April 2023 - For units of a mutual fund that are covered by section 50AA and acquired on this date, the capital gain will be considered as Short-Term Capital Gain (STCG) and treated as your applicable income tax slab rate, irrespective of how long you hold them.  
• Investment made before 1 April 2023 - If you acquire a gilt fund on this date and hold it for more than 12 months (listed) or 24 months (unlisted), the gains on redemption are generally considered as long-term capital gain (LTCG) and taxed at 12.5% without indexation benefits.     

Dividend (IDCW) Tax

If you opt for IDCW (Income Distribution cum Capital Withdrawal), it is treated as income in your hand and taxed at your applicable income tax slab rate. 10% TDS (Tax Deducted at Source) may also be applicable if you cross the Rs 10,000 threshold limit in a financial year. The TDS deducted is adjusted against your final tax liability.