What are Gilt funds?
There are different modes of investment. Gilt funds are a completely different type of investment mode. Gilt funds are the kind of mutual funds which invest indifferent, medium-term as well as long-term government securities and only extraordinary quality corporate debt instruments. Gilt funds are the safest mode of investment as this scheme invests mainly in the low-risk instruments or investments with AAA grade.
How is Gilt fund different from other instruments?
These Gilt funds are very different from that of bonds. Bond funds are used only to invest in mainly government securities, money market, and corporate bonds. While a Gilt fund allows the investor to solely invest in low risk and high-quality instruments such as, government securities. Due to this, investors’ money is protected against the capital risk and also ensures moderate returns along with it. It is different from any other normal equity, debt or any mutual fund as it ensures asset quality better than other funds, and even though the returns are moderate, it’s an ideal option for investment for a risk-averse investor
An investor gets to choose between two kinds of plans under Gilt funds. One isthe dividend plan and the investment plan. With the dividend plan, the fund will declare dividends earned from the net income by the way of interest and actual capital gains. While with the investment or growth plan, the returns would be reinvested. According to the financial freedom of the investor, he can select any one of the plans available.
The returns on Gilt funds are highly dependent on the fluctuations of interest rates as there is an occurrence of an inverse relationship between the interest rates and the bond prices. So, when the interest rates fall, prices of the government securities rise eventually profiting the performance of the gilt fund. There are instances wherein, the Gilt funds give good returns while other assets like equity are performing very badly as the equity and the debt performance is inversely related. As Gilt funds are debt oriented funds, there is no Securities Transaction Tax (STT) applicable. Gilt fund have no credit risk, the guarantee of capital protection, easy investment mode for government securities and give moderate returns in the short run. While the disadvantages related to Gilt fund like the returns being very moderate, with low interest there is no guarantee that the returns will be high and there can occasions wherein the manager can find it difficult to liquidate the investment. Thus, one should weigh one risk taking capacity, the track of the fund’s performance and his financial goals and then decide to invest in the Gilt funds.
Whether to invest or not?
Whenever any investor thinks of investing in any stocks or bonds, one important thing that they would like to ensure is that of security of funds. Gilt fund cater to the needs of all kinds of investors with a good amount of security and good returns with it. As the securities are issued by the government, the investment becomes less risky than the corporate bonds and also gives better returns than that of direct investments. The minimum investment limit for investors to invest in the securities through Gilt funds is Rs.5000 only.
CRISIL Mutual Fund ranking has claimed that Gilt funds had performed better than that of other mutual fund schemes by offering best returns. A Gilt fund can only fetch an investor with high returns only when interest rates are falling. Thus, an investor should avoid buying Gilt funds when interest rates are expected to rise in the near future.