Gilt Funds for NRIs- Meaning, Benefits, Risks & Taxation

Gilt funds are mutual funds that invest in securities issued by the central and state governments. Due to its sovereign backing, these funds are stated as one of the safest debt instruments in India. Gilt funds aim to provide stability, safety, and reasonable returns to the investors. Further, NRIs can invest index based Gilt funds or actively managed Gilt funds. 

Want to know more about Gilt funds for NRIs? Read the blog and know everything about it, from its meaning, benefits, to who should invest in it, and so on. 

What is a Gilt Mutual Fund?

The term "gilt" comes from the word "gilt-edged," which refers to high-quality bonds issued by the Indian government that virtually carry no default risk. In simple words, these are debt mutual funds that primarily invest in government-backed securities. These funds generally include government of India securities (G-secs), Treasury Bills (T-bills), and State Development Loans (SDLs). These are all backed by the sovereign. 

Additionally, the Gilt mutual fund allocates a minimum of 80% of its assets in government securities. The investment horizon of these funds ranges from medium to long-term maturities (three to twenty years). 

Further, as these investments are backed by the government of India, unlike other investments in terms of debt, these are considered to have low risk. However, such funds are not unaffected by the interest rate fluctuations, which impact returns given the market conditions. These funds are somewhat stated as a traditional option for investment and are often involved in government mutual funds, providing low-risk investors. 

This was all about Gilt mutual funds. Moving ahead, let's know the benefits of investing in these funds. 

Benefits of Investing in Gilt Funds

By investing in a Gilt fund, as an NRI, you can get the following benefits:

• The Gilt fund provides access to different government of India securities (G-secs), which increases the range of investments. 
• Gilt funds offer relatively stable but market-linked returns.
• Investing in these funds in comparatively more liquid than directly investing in G-secs.
• If the interest rate decreases by the RBI, the value of G-secs tends to increase, thereby resulting in capital appreciation.
• Generally, the investment strategy of a Gilt fund is pre-defined and shown on the scheme document of the fund. 

These are some of the key benefits that NRIs get while investing in Gilt funds. Moving further, let's know who should invest in these funds. 

Who Should Invest in Gilt Funds?

Gilt funds are suitable investment options for:

• Over the medium to long term, if you are looking for capital appreciation or income generation.
• If you want to diversify your investment portfolio.
• If you are a traditional investor planning to invest in G-secs primarily to safeguard investments.

This was all about who should invest in Gilt funds. Moving forward, let's know how to invest in these funds.

How do Gilt Funds Work?

The Reserve Bank of India (RBI) is considered the banker of banks and the apex bank of India. Considering this, when the state or central government needs funds, it approaches the RBI. After borrowing from other financial entities such as banks and insurance companies, the RBI provides funds to the government. 

Further, in exchange for the loan,G-secs are issued through auctions and are purchased by gilt funds in the market. Upon maturity, the government securities are redeemed at maturity, and the principal amount is paid back to the fund. For investors, the funds are a perfect combination of reasonable returns and low risk. However, the performance of these funds is highly dependent on the movement of interest rates. So, gilt funds generally perform better during falling interest rate cycles, though timing such movements is difficult.

Moreover, the mutual funds that invest in these securities are known as Gilt mutual funds. In this, you can invest even a small amount and get exposure to well-diversified G-secs. 

So, here is how Gilt funds work. Moving ahead, let's know how these funds are taxed. 

How Are Gilt Funds Taxed?

Gilt mutual funds are a type of debt mutual funds and they are taxed according to it. Due to updates in the Union Budgets of 2023 and 2024, these funds faced changes in their tax treatment. To provide you with an idea, here is an overview of the present tax implications.

Tax Rules Before April 1, 2023

These tax rules apply to investments made before April 1, 2023

• Short-Term Capital Gains (STCG): Capital gains from units sold within 36 months are classified as short-term capital gains and taxed as per the investor's income tax slab rate.
• Long-Term Capital Gains (LTCG): Capital gains from units held for more than 36 months are qualified as long-term capital gains. Additionally, with indexation benefits, they are taxed at 20%. 

Tax Rules After April 1, 2023

These tax rules apply to investments made after April 1, 2023

• No LTCG Distinction: In the Union 2023 Budget, the STCG and LTCG distinction was removed. Considering this, regardless of the holding period, all capital gains from all funds purchased after April 1, 2023, are treated as STCG. 
• Taxation as per Income Tax Slab: Capital gains are included in the taxable income of the investor and taxed as per their income slab rate.
• No Indexation Benefit: For Gilt mutual funds, indexation benefits are no longer applicable.

Updates in the 2024 Budget

Impact on investments made before April 1, 2023

• Adjusted LTCG Tax Rate: The long-term capital gain tax rate without indexation benefit is revised to 12.5%.
• Reduced LTCG Holding Period: For funds bought before April 1, 2023, the required holding period for tax treatment of LTCG was shortened to 24 months.
• STCG Tax Treatment Unchanged: STCG will continue to be taxed according to the income tax slab rate of the investors.

This was all about how Gilt funds are taxed in India. Moving further, let's know things to consider as an investor while investing in these funds.

Things to Consider as an Investor While Investing in Gilt Funds

Here are the following things that you need to consider while investing in Gilt funds:

• Consult a Financial Advisor: If you are not sure about the product selection, it is advisable to consult a financial advisor.
• Interest Rate Risk: While Gilt funds have little to no credit risk, they are sensitive to interest rate fluctuations. It means that when interest rates rise, their net asset value (NAV) can fall, making them a suitable investment option for long-term goals. Considering this, usually, fixed-income assets (bonds) contain the interest rate risk. Therefore, interest rate risk is one of the key elements that drives the G-sec price. Further, the bond prices and interest rates are inversely related. It means:
• A decrease in interest rates results in an increase in bond price.
• An increase in interest rate leads to a decrease in bond price. 
• Returns: returns from gilt funds vary based on interest rate movements and are not fixed or guaranteed. However, returns from these funds are highly variable with fluctuation in interest rates and are not guaranteed. 
• Expense Ratio: To cover their operational expenses, Gilt funds generally charge an expense ratio. Considering this, it is vital to compare the expense ratios for different funds, as across funds they may differ.
• Investment Horizon: Gilt funds are generally ideal for investors who have a medium to long-term investment time period. 

These are some of the things that NRIs need to consider when investing in Gilt funds. 

Final Thoughts

Lastly, being a type of debt mutual fund, Gilt funds for NRIs are a suitable option for those seeking low-risk investments that provide stable income. However, before investing in these funds, it is vital to understand their meaning and how they work. It helps in making informed investment decisions. Additionally, also helps you in building a diversified investment portfolio.

Further, if you need any assistance while investing in these funds, connect with Savetaxs. Our financial experts will provide you with complete assistance from start to end. With them by your side, you will be able to make a correct investment decision as per your financial goals, risk tolerance, and time horizon.