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All You Need To Know About Gilt Funds
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Gilt funds are the funds which are invested in fixed-interest generating securities of the central and state governments. If an individual invests in gilt funds they earn through returns from gilt funds and capital appreciation that on the amount that is invested. Gilt funds are constructed with an objective that includes investments with a low risk. They are the best options for early investors who wish to obtain great returns which are slightly higher than the traditional savings account. If an investor wants to invest in short term debt securities, they can always explore on what is money market fund. They most often invest in all types of short, medium and long-term securities. As gilt funds can be issued by corporations, gilt funds can also be constructed with corporate debt or equity gilt securities.
How do gilt funds work?
Gilt funds are a type of debt funds that will invest in government securities, central government loans and state development loans of medium to long-term horizon. When the Government of India needs funds, they approach the Reserve Bank of India (RBI) for their financial needs. The RBI also acts as a banker to the government. Thus, they RBI will lend the money to the government after taking it from different entities like banks and insurance companies. In return for the loan, the RBI will provide the government with securities that have a specific tenure that are subscribed by the fund manager of a gilt fund. Upon their maturity, the gilt fund will return the government’s securities and receive the money in return. For an investor, gilt funds can be an ideal blend of safety and earn reasonable returns. The returns are generally dependent on the movement of interest rates and the time of a falling interest rate will be the best time to invest in gilt funds.
Gilt funds have an inversely related to interest rates which means that any fall in the interest rates will lead to an increase in bond prices that will benefit the performance of gilt funds. So, in case if there is a fall in the interest rates, it’s good for debt funds market including gilt funds. Thus, it is always good to keep some part of an investors portfolio in gilt funds for using the fall in interest rates. But before investing in gilt funds, it is advised to asses the risk-taking capacity, financial goals and the fund’s track record. If the investor clearly understands the debt market, then opting for gilt funds can be a good investment option for them. Generally, funds move the most of all debt funds when the interest rate fluctuates. An investor should understand their investment horizon and their ability of handling the risk before investing, in a situation where the interest rates increase, gilt funds will underperform.
Author bio: Swarali Chavan is a finance professor who loves study about market investment instruments. She has written on gilt funds. Through this article, she has provided detailed information on all you need to know about gilt funds.
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