All you need to know about Gilt funds

This article presents a snapshot of gilt funds and why they must essentially be a part of your investments portfolio.

Of all the various types of investors, the risk-averse type forms the highest number. These generally comprise investors who are new to the markets, or those who have their money parked primarily in traditional options like FDs, with only a minimal exposure to the markets. They are focused on stable growth with a minimal risk of loss.

If you wish for a low risk, high growth investment option with a shorter time horizon, you must explore gilt mutual funds.

Decoding gilt funds: What they are

Gilt funds invest your money in the G-Sec market, i.e. in Government securities. These are known as ‘gilts’ in investor parlance. They are short-term securities while some are long term, though the latter are not generally preferred. They are normally low on credit risk and accrue interest by holding debt instruments till maturity. The appreciation on your investment also comes when the instruments in the fund rally around in terms of price corrections.

The most basic benefits of investing in gilt mutual funds are as follows –

* There is almost a zero-default risk on gilt funds in India, since the money is parked in sovereign funds.

* Since the RBI has opened the investments platform via banks and leading fund houses for investing in the G-Sec market, investors have easier access to gilt funds than before. Only an online sign-up is required for investors to buy the highest performing gilt mutual funds from the fund house of their choice.

* No exit load is levied on the gilt funds in India.

* The returns on gilt mutual funds are linked to the RBI’s repo rate at the time of investment. When the rates remain unchanged, it is often a good time to invest in gilt funds for good returns on the G-Sec market. They offer a fixed rate of interest, with the returns being calculated from the interest earned on the initial corpus.

* Another reason to invest in these funds is when the equity markets do not perform well, which gives debt markets the opportunity to perform better.

* These funds are suitable for the short term, i.e. 3 years and more. The growth spurts seen in the gilt fund over the short term are not seen in the long term. In the latter case, the fund behaves more like a regular bond fund, which does not promise as much growth potential.

* Gilt funds in India are highly liquid, but they are not completely free of risk. The NAVs may drop dramatically when rates rise.

* However, the highest performers in this asset class have registered growth rates as high as 12{11f6ea8ed58e173c901637ae862fed7eb3d629f8c379cc409caaeaefd569d5b6}, though the return rate cannot be guaranteed at the time of investment.

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