Last Updated on 22/03/2022 by Deepak Singla

Every investor’s risk appetite depends on his own self-interest and the vulnerabilities of the money market. While some prefer aggressive growth, many rely upon the slow and steady process of capital preservation. The investors who believe in the latter investment process, debt funds seem to be the best choice. There are several options in the market for one to choose a suitable debt fund. Gilt funds are one of those options that are highly preferred by investors with zero risk tolerance.

Gilt funds make investments in government securities issued by the RBI (Reserve Bank of India). The credit risk of these funds sum to zero as the government of India backs their credibility. The RBI raises these funds to help finance the needs of the Central or state governments. To make secured investments, check top gilt funds here.

Gilt funds are as secure as the locked piggy banks possessed by children.

Are Gilt Funds And Mutual Funds Similar?

Gilt funds are a type of mutual fund that are comparatively more secured. The interest rate and government securities have an inverse relation. Thus, when the interest rate falls, the prices of securities rises, and vice versa. The reason why gilt funds are becoming popular among Indian investors is that it offers a perfect blend of reasonable returns and long-term security. The asset quality of these funds is very commendable as compare to other equity mutual funds in the market. Investors who do not prefer taking a lot of risk in the initial years of investment can rely upon gilt funds.

Points Of Consideration Before Gilt funds Investment

Gilt funds investments are volatile to some extent, as the market fluctuations are inevitable. There are some factors that an investor must pay enough consideration before putting the money at stake.

1. The Expected Returns

A wise investor is one who speculates his returns much earlier than making the investment to get an idea of his estimated wealth. The gilt funds are popular for generating relatively high returns. Although there are no guaranteed returns, one is at a lesser risk since the variation in returns depends upon the interest rate announced by the RBI. As per previous records, the gilt funds offer as high as 12% interest rate on investments. The best time for investing in gilt funds is when the interest rates are falling or the economy is under depression.

2. Cost Of Investment

Nothing in this world comes for free, not even investments. Just like every mutual fund available in the Indian money market, the gilt funds also charge an expense ratio annually. The money collected from this annual fee is majorly for paying the fund manager’s fee. Since the SEBI (Securities and Exchange Board of India) has defined the upper limit of this ratio as 2.25%, the rate usually never jumps this limit. However, a fund manager may charge some additional fees under the name of a strategic cost.

3. The Investment Horizon

The RBI is liable to issue government securities under the gilt funds for a predefined tenure which usually ranges between 3years and 5 years. Investors can choose the investment period depending upon their self-interest and calculations of future earnings. It is always better to go for the 5-year plans since gilt funds are volatile to interest rates one can make huge profits during a fall in the same. Whether a fund will turn out to be profitable or not highly depends upon the investment horizon.

4. The Tax Levied On Investment Gains

Every investor is well-aware of the fact that every mutual fund is taxable apart from the ELSS (Equity Linked Savings Scheme) funds which are not taxed under Section 80C. Gilt funds are no exception to this rule and fall under the tax regulations of debt mutual funds. The amount of tax depends upon the investment period. Short Term Capital Gains (STCG) is for 3 years or less and Long Term Capital Gains (LTCG) is over 3years.

5. Financial Goals

Investment without any pre-established financial goals may not yield desired returns. An investor must know his expectations from the investment to make a wise choice. Like, gilt funds are best for investors who wish to accumulate stable returns with zero credit risks. Since the fall in interest rates has a positive impact on gilt funds returns, these are the most suitable and profitable options in falling market circumstances. Investing in government securities is comparatively more reliable as compared to other debt funds.

The irony about the investment market is that every investor knows that it involves a lot of risks and yet their goal is to abate the same as much as possible. Gilt funds serve the purpose of this ironic thought by bringing a balance between high returns and limited risks. One should weigh the pros and cons of selecting these funds to avoid possible hindrances in the future. Despite all the fact that markets are always at risk, investors can get healthy returns if they possess the proper knowledge.