Many business owners look for options to park their surplus funds in low-risk opportunities. With economic uncertainties and market volatility, it is challenging to find such an avenue. But don’t worry!

In today’s KOFFi break, we will explore an instrument named Gilt funds. These funds are a unique blend of stability, and steady returns, and an ideal choice for business owners for idle fund parking.

What are Gilt Funds?

Gilt funds are a type of debt funds that invest in bonds and government securities. These securities are issued by the Reserve Bank of India (RBI) on behalf of the Government of India. As the money parked in Gilt funds is invested with the Government, these funds are most reliable and safe.

How Gilt Funds Work?

When the state and central government need funds for any development in the country, they ask the Reserve Bank of India(RBI). RBI collects these funds from big financial organizations and banks by issuing Government Securities. Then it lends it to the state and central government. Gilt funds invest or subscribe to these government securities with fixed tenures.

After maturity, this gilt fund redeems the government securities and receives money in return. Here’s a step-wise breakdown of how Gilt funds work:

Step 1: Pooling of Money

• Gilt funds pool money from various investors and business owners like you.

Step 2: Investing money in Government Securities

• The money that is pooled from investors is used to buy Government securities.

Step 3: Earning Returns

• Returns are earned by gaining interest on these securities and capital gains because of a change in bond price.

Step 4: Redemption of Money

• Once the securities are matured, funds receive a payout which can be distributed to investors or reinvested in other securities.

It’s time to know all the benefits that Gilt funds provide in fund parking. Let’s go through it!

Benefits of Fund Parking in Gilt Funds

• More Safe and Secure: Gilt funds are backed by government securities, which means the chance of losing your money is extremely low. Even the Government will never fail to return the loan money that is taken from RBI.
• Stable Returns: These funds are considered ideal for investors who want to park their surplus funds because of their predictable and stable returns.
• No Lock-In: Gilt funds generally don’t have a lock-in period. It allows you to withdraw your funds whenever needed. However, always check the lock-in period conditions for specific Gilt funds.
• Diversification: Adding Gilt funds to your portfolio can help balance the risky assets.

Risk and Returns associated with Gilt Funds

As a business owner, you might be looking to park your surplus funds in gilt funds but, it is very important to understand the risks and returns.

Risks Involved in Gilt Funds

• Interest Rate Risk: When the interest rate rises, the price of the existing bonds decreases and this leads to lower returns. Inversely when interest rate falls, gilt funds benefit in terms of capital appreciation.
• Duration Risk: Duration of the bonds in Gilt Funds, impact the interest rate change. Longer duration bonds are sensitive to the interest rate change rather than shorter duration bonds. So longer duration gilt funds can experience more price fluctuation.

Returns Involved in Gilt Funds

• Interest Income: The primary source of Gilt funds is interest income from government securities.
• Capital Gains: Capital Gains happen when the price of the bonds in the funds increase. Bond prices rise when the interest rate falls.

These are the major risks and returns involved in Gilt funds. Let’s see who should use Gilt funds.

Who Should Use Gilt Funds

Gilt funds are a great option for fund parking for various categories of investors. Let’s look into the list:

• Business Owners:

• • • Those who have surplus funds to park without getting involved in any market risks.
    • Those who wish to get a stable and predictable return from fund parking.

• Conservative Investors:

• • • Investors who prefer minimum risk and prioritize capital safety.
    • Investors who want to protect their principal amount by earning stable returns.

• Retirees:

• • Retired individuals who need a reliable source of income without high risk.
  • Retirees who want to ensure their savings are protected while earning returns.

Things to keep in mind before Fund Parking

If you are the one who wants to park their funds in Gilt funds then, keep these in mind. Here’s the list, go through it:

• Interest Rate Trends: Keep close attention to the current trend of interest rates. It fluctuates due to many reasons like economic outlooks, etc.
• Fund Manager Expertise: You need to check all the track records of navigating different interest rate cycles. Understand their strategy and ensure that it aligns with your fund parking goals.
• Expense ratio: Choose the Gilt fund which has the lowest expense ratio. You can compare the expense ratios of different Gilt funds.
• Tax Implications: Short-term and long-term gains have different tax treatment on your parked fund. Capital gains for less than 36 months are taxed at your as per tax slab but long-term gains for more than 36 months are taxed at around 20%.

For business owners in India, Gilt funds offer a stable and secure fund parking option. These funds have the best liquidity with no lock-in, and better safety as they invest in government securities and are mainly low-risk.

Now, after understanding how Gilt funds work, their risks, returns, and benefits, it’s easy for you to make a decision on fund parking in Gilt funds.