Given the backdrop of a volatile equity market, and with interest rates falling, conservative or risk averse investors switch their preference to medium and long term gilt funds.
In the current scenario, with financial markets swinging downwards, investor concerns hover around protecting capital while earning decent returns. Simultaneously, the RBI has cut key rates to ease liquidity in the system to fuel growth. Reducing interest rates increase prices of government securities on account of their inverse relationship, making them attractive investments as the coupon rate becomes higher than the prevailing interest rate. Therefore, conservative investors tend to diversify their portfolios to include gilt funds.
Concept
Gilt Funds are mutual funds that invest solely in government paper i.e. securities issued by the central and state governments, with medium or long term maturity profiles.
Credit quality
Gilts have the highest credit and sovereign ratings, no default risk, and are hence rated higher than AAA-rated bonds. Sovereign support assures safety of principal and secured coupon payments, while providing better returns than direct investments in these securities by investing in a variety of G-Secs that yield varying rates of return.
Suitability
Gilt funds are ideal for the conservative medium to long-term investors who are looking for a steady source of income. They yield returns relatively higher than short term debt and cash funds, and tend to respond more actively to changes in interest rates, as compared to corporate bonds where most short term and cash funds are parked. Short term gilt funds invest in G-Sec with short maturity profiles, which reduces the risk of market price changes due to interest rate modifications.
Advantages
Gilts are backed by the government providing secured returns while ensuring safety of investment. Gilt funds invest in paper issued by the government, though they are not government backed. They provide a high degree of liquidity and flexibility compared to direct investments in government securities.
Being more liquid than institutional bonds or corporate debt, most funds are open ended and provide liquidity within 48 hours from placing the redemption request, and even faster at designated centres.
Investors benefit from safety, liquidity, capital gains, and tax efficiency.
Taxation
Gilt funds are treated at par with debt funds and are therefore eligible for the benefit of indexation on capital appreciation. Although Dividend income is not taxable in hands of investors, fund has to pay a dividend distribution tax at 14.16 per cent (Inclusive of surcharge and education cess.) if dividend is being paid either to individuals or a HUF (Hindu Undivided Family)
Interest, savings
Last updated 491 days ago by Anil
