What are Gilt Funds?

The funds issued by central or state government having a fixed rate of interest are called Gilt funds. The money collected from investments through Gilt funds is used in improving the national infrastructure and other related things. Hence, the money you invest in gilt funds is your contribution towards the uplifting of the nation while it earns returns for you.

How gilt funds work?

Reserve Bank of India (RBI) apart from being the apex bank in the country, also acts as the regulator of Gilt funds. whenever any government, Central or state, needs money for development and approaches RBI, it lends it the required amount after taking from other banks and insurance companies.

In return to this, the RBI issues securities like bonds or gilt funds which are subscribed by the fund manager of the gilt fund. The funds are returns and money received upon maturity. Gilt funds are the most suitable option for people who are looking for investment instruments which are low at risk and offer reasonable returns.

Who should go for gilt funds?

People who rate security high and risk very low should go for gilt funds. since gilt funds are invested in government securities only, they fall very low on risk and are long-term investments hence providing with a cushion over market corrections. The objective of the investment is capital preservation with modest returns.

Gilt funds are better than equity as they provide better asset quality even if the returns are returns are lower. If you are a risk-averse investor, gilt funds are your investment avenue.

Things to consider before investing

Before you start investing, there are a few things you need to keep in mind;

  1. Fund objectives

The next thing to consider is the objective of the fund. This will help you understand the investments process, asset allocation and how the fund manager is going to work with your money. As far as Gilt funds are concerned, the investment objective is Capital Preservation mostly.

  1. Returns

The return aspect of the Gilt funds is the next big thing while selecting them. Gilt funds have been quite productive with returns as high as 12%. Even when the economy was lagging, gilt funds have never disappointed the investor. Once you have made the investment, make sure you review your funds on a regular basis. For the first three years a bi-monthly or quarterly review is necessary to track the performance.

  1. Risks

Since Gilt funds are government bonds, they do not or carry minimum risk as compared to other instruments in the market. The government does not default on fulfilling its promises and obligations.

  1. Cost

An annual fee is charged when you subscribe for Gilt funds called Expense ratio. This charge is the manager’s fee. The upper limit for the annual fee is 2.25% for debt funds as per SEBI specifications.

  1. Lock-in

There is a lock-in period for Gilt funds from 3-5 years. You need to check this with your financial goals. If they are not in alignment with your long-term financial goals then you need to revisit your decision and make a better choice.

  1. Tax on gains

The capital gain on gilt funds is taxable. The holding period defines your rate of taxation. The term of investment is mapped across 3 years. If you stay invested for more than 3 years, it is a long-term capital gain and if the term of investment is less than 3 years, it is short-term capital gain.

STCG is taxed as per your slab rate on total income, LTCG is taxed at 20% and 10%, with and without indexation respectively.

How to invest in Gilt funds?

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  1. Login to piggy.co.in
  2. Key in your personal details
  3. Get your e-KYC done within minutes
  4. Select fund of your choice from the variety available as per your needs

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