What are Gilt Funds? – Meaning of Gilt Mutual FundsAs per the Securities and Exchange Board of India, SEBI, ‘gilt funds are mutual funds with minimum 80% of its assets in government securities’. Gilt mutual funds invest in bonds and other fixed income securities issued by central and state governments. Gilt mutual funds invest in two types of government securities:
- Government securities with fixed maturity (10 year constant maturity)
- Government securities with varying maturities.
The Reason Behind the Name – Gilt FundsGilt Funds originated in the United Kingdom. The British government would borrow funds from the public and issue physical bond certificates in return. These bond certificates would have a border of thin gold paint. Hence, they came to be known as ‘Gilt-edged’ certificates. Gilt mutual funds are also known as sovereign bond funds as they carry sovereign (government) guarantee.
How Do Gilt Mutual Funds Work?There are 3 parties to the working of Gilt Funds:
- The Government
- The Reserve Bank of India, RBI
- Mutual Fund schemes
What are the Types of Gilt Funds?There are two types of gilt mutual funds in India:
- Across maturities gilt mutual funds.
- Constant 10-year maturity gilt mutual funds.
- Short term government securities (1-3 years)
- Medium term government securities (3-5 years)
- Long-term government securities (10+years)
What are the Risks of Gilt Mutual Funds?Gilt mutual funds are debt funds. But unlike debt funds, gilt funds do not face credit risk or liquidity risk. The biggest risk faced by gilt mutual funds is Interest Rate Risk.
Gilt funds and Interest Rates – a detailed explanationGilt funds and interest rates have an inverse relationship.
- Interest rates increases = Yield on gilt securities falls
- Interest rates decreases = Yield on gilt securities rises
Why are Gilt Funds Rallying? - Reason Behind Gilt Fund’s RallyGilt mutual funds have been one of the top performers in 2020. Top gilt mutual funds generated a 1-year return of more than 12%! The reason behind this was RBI’s falling interest rate regime. To help the economy during the COVID19 pandemic, RBI reduced interest rates to multi-year lows. Reduced interest rates meant that old bonds were in high demand and their yields increased. Also, since gilt funds are ‘guaranteed’, investors preferred them over equities during the pandemic uncertainty.
Who Should Invest in Gilt Funds?Normally, low-risk investors invest in debt mutual funds for their short-term financial goals. But this is not true for gilt mutual funds. Gilt mutual funds are highly reactive to interest rates. The Net Asset Value, NAV of gilt mutual funds experiences high fluctuations. Hence, only high-risk investors should invest in gilt mutual funds. Gilt mutual funds are suitable for investors who understand interest rate movements. But such investors need to time their entry and exit to make decent profits.
Who Should Not Invest in Gilt Funds?Low-risk or conservative investors should not invest in gilt funds. Investors with a short-term investment horizon should also avoid gilt funds. Here is an example of how volatile gilt funds can be: SBI Magnum Gilt Fund is one of the top gilt mutual funds in India. It’s Assets under Management, AUM is Rs 4,396 crores. The fund gave a return of 28.24% between 31.03.2001 to 02.04.2002. But the fund also fell by 15.42% between 2nd January 2009 and 4th Jan 2010. This proves that gilt funds are extremely volatile. Timing is everything when investing in gilt funds. Since retail investors are not expert enough to time the market, they should stay away from gilt funds.
Things to Consider before Investing in Gilt Mutual Funds1. Average Maturity: Average maturity shows the average maturity of papers held by the gilt fund. Investors should try to match their goals to the average maturity of gilt funds. 2. Yield to Maturity: Yield to maturity shows the return the fund will generate if the underlying portfolio is held till maturity. This is a good indicator for investors to set their return expectation. But the yield to maturity does change as the fund manager buys and sells bonds. 3. Modified Duration: Modified duration measures the sensitivity of the bonds to interest rate changes. A high modified duration means high volatility when interest rates are increased or decreased. 4. Risk – Reward Ratios: Ratios such as Standard Deviation, Sharpe, Beta and Alpha are also important while investing in gilt funds.
- Standard Deviation helps you measure the volatility of the fund. A high standard deviation fund is suitable for high-risk individuals only.
- Sharpe: A high Sharpe ratio than peers means the fund has generated high risk-adjusted returns.
- Beta: A beta of more than 1 indicates that the fund will have wide ups and downs compared to the benchmark.
- Alpha: Alpha shows your funds’ outperformance over the benchmark.
How are Gilt Mutual Funds Taxed?Gilt mutual funds invest in government ‘debt’ and hence follow debt taxation. The holding period for gilt mutual funds is 36 months or 3 years.
- If you redeem before 3 years, then short term capital gains tax of 15% is applicable.
- If you redeem after 3 years, then long term capital gains tax of 20% with indexation is applicable.
List of Best Gilt Mutual Funds in India for 2021 – Across Maturities Gilt Funds
|Best Gilt Mutual Funds - Across Maturity||1 Year||3 Years||5 Years||10 Years||Average Maturity|
|L&T Gilt Fund||7.51%||8.22%||8.20%||9.18%||6.89 years|
|Aditya Birla SL Government Securities Fund||8.56%||9.76%||10.09%||9.81%||8.79 years|
|IDFC Government Securities - Investment Plan||9.13%||11.14%||9.74%||9.98%||7.01 years|
|HDFC Gilt Fund||7.00%||7.84%||8.32%||8.26%||8.34 years|
|Kotak Gilt Fund||9.48%||9.88%||9.26%||8.85%||11.01 years|
List of Best Gilt Mutual Funds in India for 2021 - 10-year Maturity Gilt Funds
|Best Gilt Mutual Funds - 10 Year Constant Maturity||1 Year||3 Years||5 Years||10 Years||Average Maturity|
|ICICI Prudential Constant Maturity Gilt Fund||9.97%||11.65%||10.29%||-||9.41 years|
|IDFC Government Securities Fund - Constant Maturity Plan||8.79%||12.24%||10.46%||9.52%||9.19 years|
|SBI Magnum Constant Maturity Fund||7.78%||10.45%||9.92%||9.78%||9.52 years|
|DSP 10 Year G-Sec Fund||8.96%||9.69%||8.88%||-||9.43 years|