What is a Gilt fund !!!!!!!!!!!!!!!!!!!!!!
As the market rates and interests frequently change throughout the day, it needs an investor to make a thorough judgement to decide where to invest in. Undoubtedly, risk and associated returns are the primary factors that come into one’s mind when looking ahead for market investments. And one such investment type that offers satisfactory returns at low-risk tolerance are Gilt funds. So, here we will get to know about the Gilt funds, why to invest in them, their safety quotient and everything that one needs to know to get familiar with them. What are Gilt funds? Gilt funds are debt funds which are primarily invested in government securities – both state and central government. RBI issues these government securities on behalf of the government with varying maturity periods. Since the investment is made to the government, they offer high security and low risk on the money financed. The RBI regulates the interest rate applied to these funds period. However, that’s not all with gilt funds. For the ones who invested in them are issued a golden-edged certificate as well. These certificates were called the gilded edge certificates and hence the name – Gilt funds. Types of Gilt funds There are broadly two classifications of the Gilt funds based on maturity periods: 1. With varied maturity In this category, the maturity period for the investment made in purchasing government securities is not pre-decided. The funds can be invested for a short-term period or even for long-term periods as well. 1.1 Short term Gilt funds The short term government bonds are shorter residual maturities say 2-3 years but offer the best returns in falling rate scenarios. They are often considered the riskiest among the debt funds with short adjustment periods against changing interest rates. 1.2 Long term Gilt funds As the name suggests, the long term gilt funds look forward to longer durations of maturity up to 30 years. They are favoured over short term gilt funds as they can be sold and bought with relatively more ease as the risk is negligible over the period. 2. With constant maturity In this category, the investment made in gilt funds stays put for years. However, the additional condition that it imposes is that the funds chosen for this category must invest a minimum of 80% in government securities. Why invest in gilt funds. Out of the many investment schemes in the market, a surge has been seen from investors towards these gilt funds in the recent time. The reasons which have piqued interest among financiers are: 1. Negligible credit or default risk: Since gilt funds are an investment made in G-secs (government securities) which are of high credit quality, there is guaranteed capital protection. 2. Government investments simplified: This is primarily for retail investors who are otherwise regulated to invest in government funds. This allows investors to diversify their investments in these funds, which actually require large sums of money. 3. Promising returns: As it has been seen that gilt funds are low-risk investments, they offer moderate returns in medium to long term maturity periods. It is often said to be a balance of risk and return from the investor’s point of view. How secure are Gilt funds? Over a time period of 10 years, the history of gilt funds has shown that it can reap profit in two-digit percentage as well as can incur losses in the same two-digit percentage. This happens due to the inverse relationship between the interest rate and bond prices. In case, there is an increment in the interest rate regime, the returns coming from gilt funds fall. However, if the interest rates decline, the profits can be relatively high and better than the equity funds as well. Another risk associated with Gilt funds is that they are low on liquidity. This means that these G-secs investments cannot be sold and bought as easily as the rest of the funds or schemes or securities present in the market. Who can invest in Gilt funds? This investment scheme is best suited for investors who can be patient with their money and prefer a secured investment over huge profits. The capital invested is safe in these funds, but the returns are generally moderate with better asset quality. How do Gilt funds work? When in time, the central or state government seeks funds, it approaches the RBI – often called the government’s banker. RBI does its job and collects funds from other banks or insurance companies. However, in exchange for these funds, G-secs are issued by RBI on a maturity period basis. Gilt funds are related to these government securities and are availed for investment through interest rate risk. Being G-secs in nature, they are safe investments with zero credit risk. So when the interest rates in the economy rise, the value of the G-secs and related gilt decreases. And if the interest rates fall, the value of associated funds and securities increase which leads to profits. The final word Though gilt funds are subscribed to government securities, they offer zero default risk, but at the same time, they are inversely related to interest rate risks. With a decrease in these interest rates, the returns can be more promising than ever, but investing in the gilt funds can be a tense affair at times. So, make sure to go through all the factors that can affect your investment made in gilt funds and reap the benefits.