What are GILT funds? And How do GILT Funds Work?

All You Need to Know About GILT FUNDS: Security Deposits, Gold, Bonds. Have you run out of safe-haven securities to protect your investments. Today, we take a look at another such instrument available to investors looking to diversify their portfolios with some low-risk securities.

While being low risk the security has also been known to provide returns as high as 12% in favorable circumstances. Here we take a closer look at GILT funds as a low-risk investment option.

What are GILT funds?

Gilt funds are debt funds that invest in government(state and central) securities like bonds and fixed interest-bearing securities issued. The investments here are directed towards government expenses like infrastructure projects. These investments are considered as low risk as they are invested with the government. The name Gilt comes from gilded edge certificates which referred to government bonds that were issued in golden-edged certificates.

These funds are mainly found in Britain but have also made their way to India due to colonization.

How do GILT funds work?

The working of GILT funds involves three parties i.e. the government( state or central), the GILT fund(investor), and the central bank(RBI) which acts as the intermediary between the government and the fund. Whenever the government is in need of funds it sources them by acquiring a loan from the RBI which acts as a banker to the government. The RBi collects these funds from banks and insurance organizations and lends them to the government. In exchange for the loan, the RBI issues government securities with a fixed tenure. The fund manager of a gilt fund subscribes to these securities.

Although GILT funds primarily invest only in government-issued debt securities they also may invest in high-quality, low-risk bonds issued by companies known as gilt-edged securities. In India, the SEBI mandates GILT funds to invest at least 80% of their assets in government securities.

Factors to consider before investing in GILT funds

Here are a few important factors that investors should consider before buying GILT Funds:

1. Risk Factor

GILT funds do not carry credit risk as governments always try their best in fulfilling their obligations. GILT funds, however, carry interest rate risk. If the interest rates rise sharply, the NAV of a Gilt Fund falls drastically.

2. Returns

The returns provided are dependent on economic performance and timing of investment. The returns provided are highly variable with the changes in overall interest rates.  In situations of economic slowdown GILT funds are known to outperform equities too. The funds however can otherwise also provide negative returns.

3. Cost

Similar to mutual funds GILT funds also charge an annual fee known as expense ratio, which includes the fund manager’s fee and other expenses. The expense ratio is set as a percentage of the fund’s total assets. The fee varies from fund to fund based on their performance, investment strategy etc. The SEBI has set an upper limit of 2.25% for expense ratios of debt funds. A fund with a low expense ratio increases the investors’ gains.

4. Investment Horizon

The average maturity of a gilt fund varies between three years to five years i.e. medium tenure. Before investing in a GILT fund it is important for investors to assess if they have a similar investment horizon of medium tenure similar to GILT funds. These investments may provide good returns in the short term too provided investments are made in economic slowdowns.

5. Type of GILT fund.

There are two kinds of gilt funds. 

– funds that invest mostly in government securities across maturities. 

– gilt funds with a constant maturity of 10 years

List of GILT funds in India 

Following are some examples of GILT funds in India

1. ICICI Prudential Constant Maturity Gilt Fund
2. UTI Gilt Fund Regular Plan-Growth
3. SBI Magnum Gilt Fund-Growth
4. Nippon India Gilt Securities Fund
5. Aditya Birla Sun Life Government Securities Funds
6. Canara Robeco Gilt Fund

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Closing Thoughts

Before investing, individuals must ensure securities like GILT funds offer value addition to the portfolio. They are best suited for investors who are looking to invest in the medium term in low-risk securities. These funds further diversify one’s portfolio and at the same time provide the expertise of a fund manager on these securities.

It is also important that the investor assess the historical returns provided by the respective funds, their consistency, market sentiments, economic performance, and current interest rates. Happy Investing.