What are gilt mutual funds? When should we invest?

What are gilt mutual funds, When should we invest in themWhat are gilt mutual funds? When should we invest?

Gilt mutual fund schemes invest in short term and long term government securities issued by RBI on behalf of Government of India. Since Gilt mutual funds invest in Government securities they carry relatively low or minimal risk. In this article we would discuss about the Gilt mutual funds, who should invest, when to invest, the risk and tax components.

When should we invest in Gilt mutual funds?

High inflation: When the inflation is at peak level, there are very little chances that RBI would touch the interest rates. This is one of the best time to invest and get benefitted from Gilt mutual funds.

Low interest rates: When interest rates are falling or interest rates are low, yield from Govt. bonds would be high. This is another scenario where one can invest in Gilt mutual funds and get higher returns.

Who should invest in Gilt mutual funds?

Gilt mutual fund schemes invest in Govt. securities issued by RBI, hence investment in Gilt mutual funds provides high safety and less risk.  Investors looking for safety of their investment and expect good returns during fall in the interest rates.

Is it completely risk free investment?

No. The gilt mutual funds also carries risk. Fiscal deficit and country’s debt burden effects the performance of Govt. securities. When interest rates are increasing, the bond yield would fall and returns from such gilt mutual funds also reduces.

What about taxation of returns from Gilt mutual funds?

There is no Securities Transaction tax. If the gilt mutual funds are sold within 1 year period, the returns needs to be clubbed with individual income and income tax needs to be paid. If the gilt mutual funds are redeemed after 1 year, it attracts 10% long term capital gains tax and 20% tax if we consider indexation.

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Exit load of gilt mutual funds

Like any other mutual fund if we exit before 1 year, 1% exit load is applicable. After 1 year, if we redeem, exit load is nil.

How you should maximize your returns from Gilt mutual funds?

Invest in actively managed gilt fund: Invest in gilt mutual funds which are actively managed gilt funds as they alter the portfolio maturity to benefit from interest rate movements.

AUM> 100 Crores: Invest in gilt mutual fund schemes where the AUM value is > 100 Crores. This shows that such scheme has gained confidence from investors.

Low exit load or zero exit load : Invest in gilt mutual funds where there is zero or low exit load. This would give an opportunity to exit in case interest rates are increasing which reduces our returns from such funds.

Invest for 1.5 to 2 years period: Investing for 18 months to 24 months would provide an opportunity to earn more when interest rates are falling. Instead of investing in bank fixed deposits or any other fixed income options, which may give low returns, investment in gilt funds in such scenarios would help in getting higher returns.

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What are gilt mutual funds, When should we invest

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Suresh KP

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