Gilt funds are funds that invest mostly in government securities. The central and state governments issue these securities which are considered as one of the safest debt instruments in India due to their sovereign backing. The aim of gilt funds is to present safety, stability, and reasonable returns to the investors. These are often referred to as gilt edged securities because of their high credit quality and government guarantee.
The following article will investigate their definition, operation, types, potential returns, risks and tax treatment. It also touches upon the list of government bonds in India that form the base of these funds.
What do you understand about Gilt Funds?
Gilt Funds are a type of debt mutual fund that specialises in buying government debt such as securities and bonds issued by central and state governments. These are securities that offer fixed interest income and mature at different times. These investments backed by the government are considered to have very low risk, unlike the other investments in terms of debts. But, such funds are not immune to the interest rate fluctuations, which can affect returns given the market conditions. Gilt Funds are somewhat considered a conservative investment option and are often included in government mutual funds offerings for low-risk investors.
Why Gilt Funds India can be a smart option for investors
Gilt funds may be an intelligent choice for investors presently because of a few reasons:
Capital growth prospects: Long-term gilt funds having a modified duration of approximately 10 years have the capability to generate capital growth of approximately 2-3 per cent over the succeeding year. This is due to the anticipated increase or decrease in interest rates.
Attractive returns: Gilt funds tend to provide attractive returns so it is an excellent income-seeking option, often included in government SIP plans tailored for low-risk investment portfolios.
Portfolio diversification: Investing in gilt funds may be a viable option to diversify portfolio risks because these investments may not be strongly correlated with fluctuations in the stock market.
Projected reduction in interest rates: Analysts are predicting that interest rates will reduce in the forthcoming fiscal year (FY25). This would probably continue to positively impact long-term gilt funds since the price of bonds tends to rise when the interest rate falls.
How do Gilt Mutual Funds work?
Gilt mutual funds collect funds from the investors and invest in government securities with various maturity periods. They derive returns in the form of interest. Also, movement in interest rates may have an impact on the Net Asset Value of the fund on a particular day. The rise in the rates lowers the market value of existing bonds and the decrease in the rates raises the market value of the same bonds (it occurs due to the inversion between the bond prices and interests).
It is important that fund managers select securities in such a way as to maximise their potential yield and at the same time minimise the risk. Gilt funds are government backed hence they offer a certain degree of stability and low chances of default although they are not immune to fluctuations in interest rates.
Gilt investments
Gilt funds are invested in:
- Central government securities
- The state bonds
- Treasury bills
- State development loans
- Fixed-rate bonds issued by RBI
- RBI floating rate bond
- Inflation-indexed bonds
These securities form a large part of the list of government bonds in India that are available for retail investment.
Different Types of Gilt Funds in India
Gilt funds in India are mostly classified into two types according to the strategy of investment and maturity profile. These types can be found across offerings listed under the top gilt funds in India as curated by financial platforms.
10-year Constant Duration Gilt Funds
The investment in these funds is limited to government securities, with more than 10 years before maturity. This will help investors to understand and predict more easily how the fund will respond to variations in interest rates given that this strategy will provide a fixed, constant period. They make perfect targets for long-term investors who have an interest in stable exposure to interest rates.
No constant duration Gilt Funds
Such funds are more flexible since they place funds in government securities that are short-term and long-term. Depending on their projections of the economy and interest rates, fund managers may switch their investments to various maturity levels.
Essential Tips before Investing in Gilt Funds India
There are some things that you should consider before making any decision to invest in gilt mutual funds:
Investment Horizon: A Gilt mutual fund is best suited in the long term so you should set at least 3-5 years as its investment horizon.
Interest Rates Risk: Returns you will receive through the gilt mutual funds can vary with a fluctuating interest rate. It is thus important to track the trends in interest rates prior to investing.
Market Liquidity Risk: In some cases, you may experience difficulties in attempting to purchase or sell government securities because market volatility may restrict trading hence restricting market activity.
Fund Manager: The effectiveness of how a gilt mutual fund performs in many instances depends upon the talent and expertise of the fund manager. This is why it is necessary to choose such a fund that is administered by a person with a proper background.
Expense Ratio: The expense ratio refers to the charge imposed on the fund company to manage your investment. You should also choose funds with a low expense ratio to increase your returns.
Ideal Investors for Gilt Mutual Funds
The people who are suited to invest in gilt funds include:
- These funds help investors participate in debt investments through mutual funds. Since they exclusively invest in government securities, they are seen as a trustworthy investment option and are often featured in government SIP plans for beginners and risk-averse individuals.
- Since gilt bonds only consist of government securities as their underlying asset, they do not expose investors to market risks. They can serve as an alternative to term deposits because they present zero risks for the investor.
- Investors nearing retirement often seek options for investing in safe and dependable choices. Additionally, they cannot afford market-related credit risks or the stress of managing funds. Thus, gilt funds can be a dependable choice with reasonable returns, managed by a fund manager’s expertise.
- Investors aiming to balance their portfolios with both stable and risky investments can include gilt funds, as they do not carry risks. Such investors often look into government mutual funds to create a diversified and low-risk financial plan.
Risks of Investing in Gilt Funds
There are certain risks associated with gilt funds. The major risks include the following:
Interest rate risk: As the interest rate moves up, the value of the government securities decreases, which will reflect in the value of the fund’s NAV. This is among the major risks of gilt fund investments.
There is no assured earnings: There are no assured earnings as in the case of fixed deposits or small savings plans.
Market timing risk: Putting money into the market at an inappropriate time, such as when the interest rate is increasing may lead to a negative payoff.
Inflation risk: In case inflation increases drastically, the real returns that gilt funds offer may not be positive.
Gilt funds are invested in securities that are backed by the government, they are still correlated to the market and need to be addressed cautiously, especially when selecting from the top gilt funds in India.
Advantages And Disadvantages of Gilt Mutual Funds
Advantages of Gilt Funds
- Credit risk is zero: Credit risk on gilt funds is zero since they buy government bonds therefore are much safer than corporate bonds.
- Exclusive access to securities – All securities which are issued by the government are not free to everyone. When you buy Gilt funds, you can have the opportunity to invest in these exclusive securities.
- Good returns – This form of funds known as gilt funds is suited for short to medium term investments because they provide good returns with little risk.
Negative features of Gilt funds
- Interest rate risk: It is possible to influence the returns of Gilt funds with interest rate fluctuations. When the interest rates increase, the value of the Gilt funds previously acquired may decrease and vice versa. Hence, when you are going to invest, it is important to monitor the interest rates.
- Poor liquidity – Gilt funds may be highly sensitive to market conditions, making it difficult to sell such funds when in an emergency that requires immediate access to funds.
Why Now Could Be the Right Time to Invest in Gilt Funds
With the recent economy, perhaps it would be a good financial decision to invest money in the gilt funds due to several reasons:
- Interest rate sensitivity: Gilt funds tend to respond to fluctuations in interest rates. The price of issued bonds may decline when interest rates increase and vice versa. But under such circumstances when interest rates are rising, fresh bonds issued at higher coupon rates end up giving decent yields.
- Inflation hedge: Gilt funds may become a hedge against inflation. The government can increase interest rates so that inflation can be put down when it increases. This is because it may lead to an increase in payments of coupons on government bonds, thus counterbalancing the impacts of increasing prices.
- Diversification: Diversification of investments can be achieved through the addition of gilt funds in the investment portfolio to help spread the risk. They may function as a complement to other more turbulent investments that are based on stock.
- Tax advantages: The government bond income benefits because it is favorably treated for taxes in most locations. This is capable of enhancing the overall rate of returns on your investment
- Stability and security: Government bonds are considered a stable investment to a certain level of security than other kinds of investments.
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