Best Gilt Funds For NRIs To Invest In 2024

Generally, as a retail investor, you have limited scope while investing directly in G-secs when compared to banks or institutional investors.

The minimum required capital often plays a crucial role in deciding whether you can invest in a particular G-sec. However with the introduction of Gilt funds, you get to invest in different G-secs by investing a comparatively smaller amount.

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What Is A Gilt Mutual Fund?

A Gilt mutual fund is a type of mutual fund that predominantly invests in Government securities issued by the RBI. A Gilt mutual fund allocates at least 80% of its investments in Statutory Development Loans (SDLs) and government securities.

The Gilt funds investment horizon ranges between medium to long-term maturities i.e., three to twenty years. As an NRI, you can invest in actively managed Gilt Funds or index based Gilt funds

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Investment In Actively Managed Gilt Funds

In an actively managed fund, the fund management actively takes proactive measures to counter any uncertain events.

Here, in an actively managed Gilt fund, the fund manager aims to achieve optimal balance between yield, safety and liquidity.

Also, an actively managed Gilt fund constantly monitors the portfolio’s interest rate risk.

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Index Based Gilt Fund

An index based Gilt fund, the fund management is comparatively less proactive than an actively managed fund.

By investing in these funds, you have the cost-advantage over an actively managed fund.

Here, the investment manager mainly aims at monitoring and minimizing the tracking error of the Gilt fund on a regular basis.

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Best Gilt Mutual Funds For NRIs

Here is a list of best performing Gilt funds - ideal for conservative investors looking for moderate returns.

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How Do Gilt Mutual Funds Work?

The Reserve Bank of India (RBI) is the banker of banks and apex bank of India. The RBI issues G-secs when the central or state government approaches RBI to borrow money for the said purposes. And RBI issues these bonds with fixed maturity to banks, retail and institutional investors to raise the sum of money.

Generally, the minimum initial investment is comparatively higher for G-secs which might discourage you from investing directly in these bonds.

Mutual funds that invest in these G-securities are called Gilt mutual funds. 

These funds offer a good alternative to investing in individual G-secs. Here you can invest even a small sum of money and get exposure to a well-diversified G-secs.

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Gilt Funds In India Offer Two Different Schemes, Namely,

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1. Gilt funds with varying maturity period: The fund invests in all kinds of G-secs with varying maturity periods.
2. ‍Gilt funds with a constant maturity of 10 years: Here, the fund aims to invest in a portfolio of G-secs while maintaining a constant 10 years portfolio maturity.

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How Are Gilt Funds Taxed?

Gilt mutual funds, a type of debt mutual fund, experienced changes in their tax treatment due to updates in the Union Budgets of 2023 and 2024. Here’s an overview of the current tax implications.

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Tax Rules Before April 1, 2023

Applicable to investments made before April 1, 2023

• Short-Term Capital Gains (STCG): Gains from units sold within 36 months were classified as STCG and taxed according to the investor’s income tax slab.
• Long-Term Capital Gains (LTCG): Gains from units held over 36 months qualified as LTCG, taxed at 20% with the benefit of indexation.

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Tax Rules After April 1, 2023

Applicable to investments made on or after April 1, 2023

• No LTCG Distinction: The 2023 Union Budget removed the STCG and LTCG distinction. Gains from all units purchased on or after April 1, 2023, are treated as STCG, regardless of the holding period.
• Taxation as per Income Tax Slab: Gains are included in the investor's taxable income and taxed according to the income tax slab rate.
• No Indexation Benefit: Indexation benefits are no longer applicable for gilt mutual funds.

Note: The holding period is calculated from the purchase date to the redemption or transfer date.

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Updates in the 2024 Budget

Impact on investments made before April 1, 2023

• Reduced LTCG Holding Period: For units purchased before April 1, 2023, the required holding period for LTCG tax treatment was shortened from 36 to 24 months.
• Adjusted LTCG Tax Rate: The LTCG tax rate was revised to 12.5%, without the benefit of indexation.
• STCG Tax Treatment Unchanged: STCG will continue to be taxed based on the investor's income tax slab.

Note: For units purchased on or after April 1, 2023, all gains remain classified as STCG, regardless of holding period, and will be added to the investor’s income for slab-based taxation.

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Benefits Of Investing In Gilt Funds

As an NRI, you can benefit in the following ways by investing in a Gilt fund,

• The Gilt fund gives access to different G-secs which increases the range of investments
• The Gilt funds generate fixed and predictable returns 
• If the RBI decreases the interest rate, G-secs value tend to increase thereby leading to capital appreciation
• Investing in Gilt funds is comparatively more liquid than investing directly in G-secs
• The investment strategy of a Gilt fund is generally pre-defined and displayed on the fund’s scheme document.

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Who Should Invest In Gilt Mutual Funds?

Gilt funds are suitable to you,

• If you’re looking for income generation or capital appreciation over medium to long-term.
• If you’re a conservative investor planning to invest primarily in G-secs to safeguard investments.
• If you want to diversify your investment portfolio.

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Things To Consider Before Investing In Gilt Funds

Following are the important points you might need to consider before investing in Gilt funds,

• Consult a Financial Advisor: You may have to consult a financial advisor if you’re unsure about the product selection.
• Credit Risk: Gilt funds invest in G-secs that carry little to no credit risk that generally implies relatively low credit risk. Credit risk is the risk of defaulting your principal amount or failing to meet the contractual obligations by the borrower. 
• Interest Rate Risk: Gilt funds can carry relatively high interest rate risk. You can refer to it as the risk of decline in asset’s value due to unanticipated fluctuations in interest rates.
  Generally, fixed income assets (bonds) bear the interest rate risk. Hence, interest rate risk is one among the primary drivers of the G-secs price.

Moreover, the price of a bond and interest rate are inversely related, meaning, 

• Increase in interest rate leads to decrease in price of a bond 
• Decrease in interest rate leads to increase in price of a bond

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Conclusion

Gilt funds primarily allocate and invest in the central or state government backed securities in India.

In India, Gilt funds offer two different schemes, namely, one with varying maturity and the other being 10-years constant maturity.

You can consider Gilt funds as a viable option if you’re a conservative investor looking for moderately risky investments.

However, it is imperative to consult a financial advisor before investing in mutual funds if you’re having any doubts.

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Gilt Funds For NRIs: Frequently Asked Questions (FAQs)

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Can NRIs invest in Gilt funds?

Yes, as an NRI, you can invest in Gilt funds offered by Indian mutual fund houses. 

However, you need to go through the fund’s scheme document to cross check whether the fund house allows NRI investments.

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Are Gilt funds better than FD?

By investing in Gilt funds you can earn between 6 to 8% of interest rate per annum.

Also, NRI FDs generate similar kinds of returns ranging between 6 to 8%.

However, the main advantage of investing in a Gilt fund is the liquidity the fund carries whereas FD has a lock-in period.

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Is it good to invest in Gilt funds now?

You can consider investing in a Gilt fund during market disruption or economic downturn., this way you can safeguard your capital.

Also, it is essential to consult a financial advisor before investing in Gilt funds as these funds carry interest rate risks.

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Is investing in Gilt funds safe?

Gilt funds predominantly invest in G-secs that have central or state government’s backing , hence, your investments are comparatively safe here.

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Are Gilt funds tax-free?

No, Gilt funds are not tax-free. 

As per the recent Union Budget, tax is levied on the Gilt funds as per the income tax slab rates.

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Are Gilt funds risk-free?

Gilt funds invest in central or state government securities. Hence, these investments typically have little to no default risk.

However, these funds bear interest-rate risk which often leads to the change in its portfolio’s value due to interest-rate fluctuations.

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What kind of securities do Gilt funds invest in?

Gilt funds generally invests in the following securities, namely,

• Central or state government securities, 
• Debt derivatives (may or may not)
• Securitized debt (may or may not)

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