These mutual funds invest mostly in government bonds. Government bonds are considered the safest bonds in the country.
If the Government of India is in need of funds (or loans), then it approaches the Reserve Bank of India (RBI). Apart from being the apex bank, the RBI also acts as a banker to the government. The RBI lends money to the government after borrowing from other entities such as insurance companies and banks.
In exchange for the loan, the RBI issues government securities with fixed tenure, to which the fund manager of a gilt fund subscribes. Upon maturity, this gilt fund returns the government securities and receives money in return. For an investor, gilt funds can be an ideal blend of low risk and reasonable returns. However, the performances are highly dependent on the movement of interest rates. So, a falling interest rate regime would be the best time to invest in gilt funds.
It is often considered an ideal investment haven for those investors who are risk-averse and want to invest in government securities. But one thing we should keep in mind is that due to the average maturity of Gilt funds, one may see higher volatility during the interest rate changes.
The minimum investment varies from scheme to scheme. It could range between Rs.100/ – to Rs. 5,000/ -.
> If an investor has made an investment in a debt mutual fund and withdraws the amount before 3 years of investment, Short Term Capital Gains Tax would be levied, as per the income tax slab of the investor.
> If an investor withdraws the investment including capital gains post 3 years of investment, 20% Long Term Capital Gains Tax of 20% is levied, with the benefit of indexation.