Getting started with Gilt Fund
Diversification is crucial to building a well-balanced mutual fund portfolio. Your investment should be spread across different types of funds with different levels of risk depending on your investment profile and financial goals. If your goal is to add more security to your portfolio, gold funds are worth your attention. It is a type of debt fund that aims to offer reasonable returns with minimal risk. Take a look at what a gold mutual fund is and understand its basics in detail.
Gilt funds are one of the UK's oldest investment options. The British deserve credit for introducing gilt funds to India. As India was once a British colony, the gold funds have been in India since the pre-independence period.
In simple words, gold funds invest their money in government-issued debt securities. Since government-offered securities are known to be a safe investment avenue, gilt funds are an excellent choice for risk-averse investors.
Debt securities generate interest income through which gold fund investors earn their returns. The yield of any gold fund depends on how the interest rate moves. Therefore, gold funds are highly recommended during the declining rate regime.
It's because as interest rates fall, prices begin to rise. This leads to an increase in the net asset value of the gilt funds. For this reason, many investors switch to gold funds when interest rates start to fall.
What are the returns you can expect from a fund?
Returns on a gold fund depend on the repo rate set by the RBI. Since changes in repo rates are not very regular, gilt funds have a reputation for generating consistent returns. Yields tend to rise if the repo rate falls and fall when the repo rate rises.
In recent years, the major gilt funds have been able to deliver consistent annual returns to10%-15% range and above. This is considerably higher than many other investment option such as bank Fixed Deposits
Benefits of Investing in Gilt Funds
Now that you know what are gilt mutual funds and the average returns they could deliver, let us have a look at some of their top benefits
-
Zero Credit Risk
-
Unlike mutual funds that invest in corporate bonds where there is always significant credit risk, gilt fund have zero credit risk. This is because the government generally fulfil its obligations. The same is not true in case of corporate bonds.
-
Capital Protection
-
While no mutual fund offers 100% capital protection, gilt funds are one of the few that carry minimal risk. Investments are made in government-backed securities, and the chances of any significant capital loss are close to none.
-
Invest in Securities Not Available to Retail Investors
-
Most of the government securities are unavailable to retail investors. But institutional investors like fund houses are allowed to subscribe to such securities. So, by investing in gilt funds, you get to invest in such government securities indirectly.
-
Reasonable Returns
-
As compared to many other investment options, gilt funds offer decent returns even if you are investing for short to medium term. Combined with the minimum risk, this is an excellent option for risk-averse investors.
Risks and Disadvantages of Investing in Gilt Funds
Along with understanding gilt funds meaning and benefits, one should also know the risks. The biggest risk in gilt funds is that of the fluctuating interest rate. The returns can fall considerably if the RBI increases the repo rate. Apart from this, there is no significant risk of investing in gilt funds.
Talking about the disadvantages, the only thing worth mentioning is the illiquidity of government securities in which gilt funds generally invest. As these securities are highly illiquid, the fund manager can't exit the investment in case of an emergency.
Who Should Invest in Gilt Funds?
If you have understood what is gilt fund in mutual fund, it shouldn't be difficult for you to decide whether or not they are the right choice for you. Risk-averse investors generally prefer gilt funds with a short to the medium-term investment horizon. If you already have a mutual fund portfolio, especially one that is more inclined towards equity, gilt funds are a great choice to add more diversification and stability.
While the returns are not as high as what top equity funds could offer, they are highly reasonable, and more importantly, come with minimum risk
You must be logged in to post a comment.