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Gilt Fund: Gilt Mutual Fund an alternative to PPF & NSC

Gilt Funds can act as a substitute for NSC & PPF for the investor who is not opting for tax deductions.

February 25, 2020 / 03:10 PM IST

If you are not availing of deductions under Section 80C for FY 2020-21, gilt funds could be an attractive prospect

If you are one of those taxpayers looking out for alternatives to Public Provident Fund (PPF) or National Savings Certificates (NSC) because you can no longer avail of the deduction from taxable income, government bonds or `gilts’ could be an option. 

What are government bonds? Most of the time, governments tend to spend more than they earn. When that happens, they raise funds from the market by issuing bonds. These bonds are called gilts because, like gold, they are considered pretty safe.

However, since government bonds are not generally available to retail investors, the only way you can invest in them is through a mutual fund that has been set up for the purpose, called a gilt fund. These gilt funds are low on risk and offer decent returns and could be ideal for cautious investors.

What returns can you expect from gilt funds?

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Surprisingly, considering that they are low on risk, gilt funds have been offering pretty decent returns compared to bank fixed deposits, and even PPF and NSC.
Returns on gilt funds
YearsReturns
112.8
210.5
37.9
58.3
Source: Moneycontrol

 

As you can see from the table above, gilt funds have yielded higher returns over one, two and five years than PPF and NSC (current interest rates are at 7.9 per cent), and significantly higher than fixed deposits of reputed, low-risk banks (around 6.5 per cent). Of course, things would be a little different if you consider the tax deduction under Section 80C available for PPF and NSC.

Tax implications

Another factor you may want to consider is the tax implication of investing in gilt funds vs PPF. You must remember that interest from PPF accounts is tax-free, so that’s a benefit you should consider. NSC and FDs enjoy no such benefit. Any interest earned from these two instruments is added to your taxable income and you will have to pay income tax according to the slab you are in.

As far as gilt funds go, if you redeem them before three years, the gains will be added to your taxable income and then taxed according to your income tax slab, like FDs and NSC. If you hold them for over three years, you will have to pay 20 per cent with indexation or 10 per cent without indexation. Indexation adjusts the purchase value of your investment for inflation, reducing your capital gains and hence the tax you pay on them. So the longer you hold a gilt fund, lower your tax outgo will be.

Interest rate risk

There is a small risk involved in gilt fund, and that is of interest rate risk. When interest rates go up in the economy as a while, yields from the government bonds in your fund’s portfolio will drop. This will bring down its net asset values (NAVs). On the other hand, if interest rates fall, your NAVs will go up. Over the long run, these ups and downs will even out, and you will continue to make fairly good returns for an investment in this low-risk category.

Gilt funds can be a good alternative to PPF and NSC if you are not availing of deductions under Section 80C. If you are availing of these deductions, you might want to consult your chartered account or financial adviser before making any investment decisions.
first published: Feb 25, 2020 03:10 pm

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