What is Gilt Funds Full Explained With Examples
In this article I will cover what is Gilt Funds and it will be easy to understand. You have heard this term many times but you will have tried to understand this, but you can’t understand. Now it is the time for getting knowledge over this topic.
What is Gilt Funds
Basically gilt fund is a category of debt mutual funds that invest in bonds and securities issued by central and state governments and because we invest in bonds issued by the government through gilt funds, we will definitely get some interest.
Now you know that the gilt funds invest in Government securities and bonds so the question of credit risk does not arise here because the government will not default at all.
If the bond issuer defaults on payment and does not return the money to the other person, it is called a Credit Risk but this will not happen with government bonds like this, so your money will definitely be safe and there is no liquidity risks in these funds because all these instruments trade in the secondary market so you can easily find its buyer and seller.
If there is neither credit risk nor liquidity risks then is it a safe option for investment ? No, the actual risk is the interest rate risk, but what is the meaning of interest rate risk, let’s understand with examples.
All bonds issued by the government are listed on the stock market and their price moves up and down due to trading in the market.
If you have invested in government bonds of 5 or 10 years which is giving interest of 10% and suppose the government issues another bond whose interest is 8%.
So it is obvious that the bond which will give more interest will be in demand, then in this case the bond is giving 10% interest, the demand will be more and the buyer and seller will be more available.
In this, the people who had taken bonds of 10%, it will be favourable conditions for them because the bond taken by them is running on high demand in the market.
Now in this situation if we see the unfavorable condition, suppose you took a bond in the first year in which the government gives 8% interest and you buy it and now the government brings the same bond in the market at 10% interest then here a bond with 10% interest will be in more demand because it is obvious that the people will get more interest.
So, in such a situation, bonds with 8% interest will now be less attractive to investors and because of this its existing investors want to sell it and due to more supply or number of sellers and less demand, its prices will start falling.
With these examples, you must have understood how much interest risk is involved in these funds and how rising or falling interest rates can affect your portfolio. Gilt funds are taxable as per your holding period if we look at excluding risk factors.
If you hold the gilt fund for less than 3 years, then short term capital gain is applicable which will be applicable according to your tax slab and if you hold it for more than 3 years, then long term capital gain is applicable which will be 10% with indexation benefit.
Now let me tell, why gilt funds have given very good returns last year. If we invest in it then will we get good returns ?
As we know, the returns of gilt funds were quite good in the last one year so that many investors attracted towards this. But actually, this happened because last year RBI had reduced the interest rate very much so that the value of existing bonds increased and people started getting good returns but this situation will always be there, it cannot be like that.
If we see last many years record books then these funds category give 3–4% returns and it has given negative returns many times, so it would be completely wrong to call it total risk free.
Conclusion
Hope it will not be difficult to understand because I have included all the necessary information about what is Gilt Funds. I have explained it with easy method so that anybody can understand in a short time.
If you have any queries about this topic then you can leave a comment below so that I can explain about that part.
Originally published at https://www.planrobotic.com on September 2, 2021.
