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What are Gilt Funds?

Gilt funds are mutual fund schemes wherein funds are invested exclusively in Government Securities. As in gilt funds investments are done only in government securities (G-Secs), these are low risk gilt fundsbearing investment options. These are also referred to as Mutual Funds dedicated exclusively to investments in Government Securities. Government securities include central government securities, state government securities and/or treasury bills.

Generally, it is not possible for retail investors to directly invest in Government Securities as the investment limit is quite high(5 crores). Probably gilt funds are the only option through which a retail investor can invest in Government Securities.

Who should Invest?

Gilt Funds are recommended for those looking for highest level of security of their investment. 

It is also tax efficient investment option, if investment is made for a period of more than three years. Gain on redemeption after three years is considered as Long Terms Capital Gain. Long Term Capital Gain is computed after providing indexation benefit. As a result net tax liability is very less.

When to Invest?

To get the Gilt Funds at the best price, the right time to invest is when the interest rates are high. When market interest rates are on higher side, prices of G-Secs are on lower side. So keep a watch and whenever you find interest rates are expected to fall, go for gilt funds. At that time you will get them at comparitively lower prices.

Types of Gilt Funds & Returns thereon?

Like other mutual funds Guilt funds also have three types of options:

Growth Option- 
Under growth option all the gains/losses made on investments are added/reduced to the NAV of the fund. Thus if things go well, NAV rises over the time. Under growth option the amount remains invested for the entire period till u reddem the fund. At the time of redemption the funds are redeemed at final NAV. The investor will realize long term gain/loss at the time of redemption.

Dividend Option- 

Under dividend options, funds distribute the income earned by them to investors in the form of dividends. Funds are not under any obligation to distribute dividend. If no income is made by the fund ie. there are losses, no dividend is distributed. NAV of the fund reduces with the amount of dividend distributed to the investors/unit holders.

Dividend Reinvestment Option-

Under this option dividend is not paid to investor/unit holder, instead it is reinvested. Means the dividend amount is used to invest in more units of the scheme. 

Returns on redemption?

Returns in the form of gains at maturity are mainly dependent upon interest rates. A fall in interest rates leads to a rise in fund prices. To have a good return from Gilt Funds interest rate movement must be watched. We can say that right time to redeem a Gilt Fund for a good return will be when there is a fall in interest rates.

Lock in Period?

There is no lock in period for Gilt Funds. However some charges (popularly known as Exit Load) may be levied on early exit from the funds. Many schemes do not have any exit load. Other schemes have exit load on early exit from 7 days to 30 days.

Tax implications? 

  • Dividend if any (only in case of investment in Gilt funds with dividend option) received from the fund will be taxable as income from other sources. 
  • Taxability of gain on redemption of gilt fund depends on the period of holding of fund. The gain on redemption is taxable as capital gain.
  • If funds are redeemed after 3 years or more there will be long term capital gain. For calculating LTCG benefit of indexation is also given. So keeping funds for long term reduces tax burden, as after indexation the taxable gain is very less and long term capital gains are taxable at 20%.
  • If funds are redeemed within 3 years of holding, there will short term capital gain, which is taxable as per the normal slab rate applicable to the investor.

Our Opinion:

Investment in Gilt Funds Growth option is a smart choice for people falling in 20-30% tax bracket with investment for three years or more.

Retired people can use Gilt fund to earn almost tax free return as their regular income using Systematic Withdrawal Plan.

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Quick Links:

What is Exit Load?

What are Government Securities?

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