Gilt funds can often bring considerable value to the mutual fund portfolio when added with due care and diligence can. But before we tell you how they bring the necessary value addition to your portfolio, we help you understand how gilt funds work.

What are gilt funds?

Gilt funds or GSECS funds are mutual funds that invest mainly in government securities (GSECS). While regular debt funds invest in debt instruments of various stripes, gilt mutual funds invest primarily in GSECS.

What are gilts?

Gilts are issued by the RBI (Reserve Bank of India) on behalf of the Government of India. The government bonds/securities play an important role in the government’s spending/investment programmes.

The government bonds are issued across tenures from 14 days (treasury bill) to 30 years (gilts).

Government bonds carry a sovereign rating (meaning they are backed by the government) so there is no risk of a default on the principal and interest. In other words, they do not expose investors to credit risk.

Traditionally, the gilt market is dominated by institutional investors (mutual funds, insurers, banks) because the minimum ticket size is on the higher side and hence beyond most retail investors. Also retail investors lack the knowledge and investor savvy required to buy and sell gilts.

Here is where gilt funds make a difference to retail investors.

How gilt funds act as enablers

Gilt funds do away with two glaring limitations that prevent retail investors from participating in the gilt market.

• They have the necessary firepower to make big purchases in the gilt market
• They are run by professional money managers / fund managers who understand gilt investment strategies, yield calculations and so on.

Individuals looking at getting a piece of the gilt market can consider investing some money in well-managed gilt funds.

How gilt funds add value

A question that a lot of investors may be asking is – why gilt funds? Why not stick to regular debt funds?

The answer lies in the nature of the beast. Gilts are launched by the government of the country and are indicators of the economic health of the nation. For an economy that is on the upswing with lower trending interest rates, stable fiscal scenario, steady GDP (gross domestic product) growth, investing in gilts could prove beneficial.

Other fixed income investments like corporate bonds, fixed deposits, NSC (National Savings Certificate), PPF (public provident fund) are different in nature and do not function in the same manner as gilts. So investors are unlikely to reap the benefits of gilts by investing in fixed deposits, NSC and PPF.

What are the tax implications of investing in gilt funds?

There are no specific tax benefits of investing in gilt funds unlike say tax-saving bonds or tax-saving fixed deposits.

Short-term capital gains on gilt funds are taxed at the marginal income tax rate.

Long-term capital gains are taxable at 20% after indexation. The holding period to avail of long-term capital gains is three years as opposed to one year previously.

Takeaways

• Gilts reflect the economic health of the nation more than any other fixed income instrument.
• They are sovereign in nature i.e. they do not carry credit risk as all principal and interest payments are assured by the government.
• Gilts are government bonds launched by the RBI for the government’s various spending programmes.
• The gilt market is dominated by large players because ticket size is high.
• Retail investors prefer to keep away from gilts because they require higher investment amounts and involve complex yield calculations.
• Gilt funds do away with both shortcomings of large ticket size and complexities of gilt investing and make it viable for retail investors to participate in the gilt market.
• There are no specific tax benefits associated with gilt funds.