What am I?
Debt funds invest in various kinds of debt securities. I am a debt fund too and I invest exclusively in government securities. Most of my peers invest in a combination of debt securities such as government securities, corporate bonds, debentures and so on. But I invest only in government securities, including central government securities, state government securities and treasury bills (securities that come with a maturity of less than a year). This simply means that I invest only in instruments where repayment of the principal amount and the periodic payment of interest is assured by the government of India.
Am I completely risk-free?
Just because I invest in government securities does not mean I am totally risk free. Sure, I am not exposed to a credit risk since the government will most likely not default to pay back the interest and principal and thus it makes me a low risk investment. But I carry volatility risk, or in other words, interest rate risk. Let me explain: when interest rates rise, the prices of government securities fall and vice-versa. So a rising interest rate scenario has a negative effect on my performance. Similarly, in a falling interest rate scenario, since there is rise in the price of government securities I invest in, I am benefited.
In fact, I am generally more volatile than other mutual funds. Since I am backed by the government, most investors prefer to invest in me. Out of all the debt securities in the debt market, I get bought and sold the most. Obviously, the more I am bought and sold, the more the price fluctuates and, therefore, the more volatile I become. That’s not necessarily a bad thing though because this also means that I am quite liquid. Of course, as I said before, if interest rates get volatile, my price gets impacted.
Who should invest in me?
Typically, I benefit when interest rates have almost peaked out—like it looks like these days—and just before they are about to fall. But many financial advisors prefer to sell bond funds that invest partly in government securities because they are more diversified. I am a seasonal fund, so I do well in pockets.
How am I taxed?
I am taxed like any other debt fund. If you hold to my units for less that a year, I get taxed as per your income-tax bracket (10.30%, 20.60% or 30.90%; rates include cess). If you hold on to me for more than a year, then you pay 20.6% with indexation or 10.3% without indexation.