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Understand Gilt Funds Through Faqs

By Author: Swarali Chavan
Total Articles: 37

The financial market undergoes constant change, which is predictable. In such scenarios, people always opt to invest in debt funds. The chances are that one might have heard or come across the term gilt funds in the debt funds market. However, many investors do not speak about it often due to a lack of understanding of the concept. The following FAQs should appease the current and future investors:

What are gilt funds?
Gilt funds are debt mutual funds which invest only in Government securities or G-sec. They do not venture into treasury bills, corporate bonds, money market instruments, etc. like debt funds. They only invest in securities issued by the Reserve Bank of India (RBI).

Gilt funds are also dependent on the investment horizon. So, there are two kinds: short-term and long-term gilt funds. Short-term gilt funds mature in 15-18 months. These investments are directed towards Government securities. Meanwhile, long-term gilt funds mature up to 30 years. Since the G-sec maturity is higher, long-term gilt funds are more susceptible to interest rate changes.

When to invest in gilt funds?
Retail investors have the option to invest in Government securities or G-sec. Such bonds have an inverse relationship with interest rates. So, if the rate of interest falls, the bond rates will increase. That, in turn, boosts the performance of the gilt funds and vice versa.
Interest rate changes are dependent on certain factors such as GDP, rising inflation, and a decline in industrial production. If any of these fluctuate, interest rate increases or falls. If they fall, debt funds such as gilt funds benefit from the same. Therefore, it is advisable to keep a portion of the portfolio in gilt funds owing to the falling interest rates.

However, before investing in gilt funds investor should monitor their financial standing, funds performance and financial goals.

Are guilt funds risk-free?
People believe that since these investments are more towards the Government securities, they do not carry any risk. False. Remember, Government securities are risk-free only towards interest and principal payment. Since Government does not default unlike corporate bonds, gilt funds do not carry any credit risk. However, they do carry interest-risk like other bonds.

Who can invest in gilt funds?
If one understands the debt funds market well, then gilt funds are ideal. If the investors know when the interest rates are expected to fall, then a small exposure to such funds is a smart choice. So, if the interest rates are falling, the investors can earn maximum returns through gilt funds. If the rates increase, the funds underperform. It is better to understand the factors that affect the interest rates to maximise the profits.

Also, investors should consider their risk appetite and investment horizon. If the investors remain invested in gilt funds for at least 10-20 years, they could get the desired returns from the securities.

Before taking the plunge, investors have to keep specific tips in mind:

• Notice the movements of interest rates
• Select the fund with an appropriate investment horizon
• Gilt funds charge an exit load fee up to 1 per cent
• Diversify the portfolio by investing a small portion

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