The share of Gilt fund assets in overall mutual fund assets stand at 1.1%, Rs 185.74 billion with total assets under management (AUM) of Rs 16,500 billion as on November 2016.
Introduction to Gilt Fund
Gilt Funds are mutual funds scheme that predominantly invest in government securities also known as G-Sec. This fund is different from other debt mutual fund that invest in debt instruments across segments.
G-Sec are securities issued by Government of India. G-Sec do not expose investors to credit risk. This makes the gilt fund a default risk free investment i.e there is a guarantee for timely payment of interest and principal.
Since the market for G-Secs is largely dominated by institutional investors, gilt funds offer retail investors a convenient means to invest in G-Secs.
Gilt Funds carry only Interest Rate Risk
Fixed income instruments carry three kinds of risks viz. Interest rate risk, Default risk and Liquidity risk. Interest rate risk arises due to fluctuation in interest rate i.e the price of the debt securities decreases as interest rates increase and vice versa. The loss generated in the short term due to changes in interest is a notional loss if the instruments is held till maturity. However the investor will incur loss only when instrument is sold before maturity.
Default risk is one wherein the issuer of the debt defaults or fails to meet its obligation on the payment of interest or principal or both. Government securities do not carry default risk as the government can always print money to pay its creditors.
Government bond market is the more liquid market in India and government bonds are repoable i.e. RBI lends funds against the collateral of government bonds. Liquidity risk is low in gilt funds.
Therefore the only major risk involved in Gilt funds is interest rate risk.
Types of Gilt Funds
There are two types of gilt funds offered by mutual funds to investors, short-term plans and long term plans.
Short term gilt funds invest in government securities with maturities ranges from 6 month to 5 years. Short term gilt funds carry lower interest rate risk than long term gilt funds.
Long term gilt funds invest in the government securities with maturities ranging from 5 years to 30 years. Long term gilt funds carry higher interest rate risk than short term gilt funds
Gilt funds are taxed similar to any other capital investment with a short-term capital gains tax for holdings of less than 3 year, and long term capital gains for holdings of over 3 year.
Why to Invest
Gilt fund is an ideal investment avenue for investors who are credit risk averse, require adequate liquidity but still look to earn reasonable return over the medium to long term time horizons. Gilt funds are driven by movements in interest rates and when there is positive view on interest rates, gilt funds are good vehicles to capture the upside.
Mutual Funds offer gilt funds with zero entry and exit load whereas for income funds they charges exit load of 0.5%. Management Expense ratio for gilt funds is less when compared to that of income funds with difference in expense ratios at around 25bps.