Gilt Mutual Funds explained!

Presenting the lowdown on gilt mutual funds and why your portfolio needs them.

Most investors today have a clear mandate for investing: get high returns over a longer time frame while avoiding risk. But there are very few mutual fund schemes that satisfy all of these parameters. Of the ones that there are, the gilt mutual funds rank quite high.

Risk-averse investors tend to make a beeline for debt mutual funds. Gilt funds are debt funds with a high asset credibility. They are great for short term investment horizons of up to 5 years.

Exploring gilt funds in India

Gilt mutual funds are fixed income Government securities. Thus, the earnings or returns on the gilt mutual funds are accrued from the interest they earn over their investment horizon. Here are some salient points you must know about investing in gilt funds in India:

• They offer a fixed rate of interest.
• Returns on gilt mutual funds are credit risk-free, owing to the investment being made in sovereign securities like State development loans and Union Government loans.
• Most gilt funds in India are rated AA or AAA, owing to their asset class. Do team up with a leading fund house for your investment. The fund house will have the latest schemes in tandem with the RBI-issued Government securities, and your fund will be overseen by an experienced fund manager as well.
• Owing to their asset class, gilt mutual funds are known to offer a good mix of safe and reliable returns. They offer moderate returns as compared to bond funds, but more stability. But the returns are largely dependent on the interest rate movements during the vesting period. You should buy the fund when interest rates fall but stay invested for a longer time so that rate movements even out.

Do you want to buy gilt mutual funds? Look out for these parameters

Investing in gilt funds in India is easy when you partner with the right fund house to do so. But consider these important parameters before investing:

* Liquidity: Gilt funds are highly liquid due to the lack of credit risk. But they are prone to interest risk corrections, which causes their NAVs to drop as well.

* Costs: The expense ratio of the gilt mutual funds is 2.25% as mandated by the SEBI. But operational costs may differ from fund house to fund house, so find out about them before buying.

* Tax liability: The returns on gilt funds in India are counted as capital gains. The taxation rate depends on the holding period. You are liable to pay STCG tax for a holding period less than 3 years, and LTCG tax for holding period exceeding 3 years.

* Return rate: The highest rated gilt mutual funds offer annualised returns as high as 12%. But this rate of return cannot be guaranteed since they depend on the interest rate regime.