Long-term gilt funds give best returns when interest rates fall

Jan 21 2014, 03:13 IST
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SummaryGains from gold ETFs will have a tax treatment similar to debt mutual funds

What is the tax treatment of gold ETFs? Do I have to pay any long-term capital gains?

— Piyush Sharma

Gains from gold ETFs will have a tax treatment similar to debt mutual funds. Thus, when an investor redeems units of gold ETFs held for more than a year, he is subjected to long-term capital gain tax of 10% without indexation, or 20% with indexation, whichever is lower. On the other hand, if the period of holding is less than a year, the short-term capital gain will be clubbed with the income of the individual investor, to be taxed as per the applicable slab of the investor. However, unlike physical gold, investors in gold ETFs benefit as they do not need to pay wealth tax.

Is it the right time to invest in gilt funds? What all should I look at before investing in them?

— Rajesh Kumar Singh

Gilt mutual funds predominantly invest in government securities of varying maturities. It is a suitable investment vehicle for retail investors to take exposure in government securities, which, otherwise, is not possible due its large ticket-size. However, before picking a gilt fund, you should look at the percentage of its government securities (GSec) exposure.

Though the fund is expected to keep 100% gilt exposure, some funds do move away from their investment mandate and invest in non-GSec papers, thereby increasing the credit risk of the fund, which, ideally, should be zero since sovereign papers are risk-free in nature.

Another important facet is the average maturity of the fund. Funds that invest in long-dated papers would have a high average maturity, increasing the risk for investors. Thus, depending on their investment horizon and risk appetite, investors can choose between short-term and long-term gilt funds. Normally, long-term gilt funds give the best returns when interest rates fall. Thus, the right time to invest in these funds should be based on one’s view on the interest rate direction.

I want to invest in some foreign funds through mutual funds in India. What is the tax treatment and do I have to give KYC?

— Kawal Rana

To Indian investors’ benefit, we do have access to foreign funds through the route of global feeder funds, which are currently being offered by a host of asset management companies. Such global feeder funds are either geographically specific or thematic in nature and provide a nice geographical diversification benefit to an investor’s portfolio. The tax

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