Gilt Funds: The concept explained

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Concept behind Gilt Funds
Gilt Funds are mutual fund schemes that invest in long-term government securities (G-secs) which normally have longer duration. Government securities are financial securities like dated government securities, state government securities, treasury bills, etc. These securities are issued by the Reserve Bank of India (RBI) to curb fiscal deficit.

Gilt Funds become popular when inflation numbers are on the way cooling down and RBI puts pause on its interest rate hikes. That's the period when the concept of Gilt Funds work.

These funds are specially designed for risk averse investors where investors are not exposed to credit risk as these funds are eligible to avail liquidity support from RBI.

Since, it is not possible for retail investors to invest directly into government securities as they come with a minimum investment limit of Rs 5 crore; so the convenient means for retail investors is to go through the Gilt Funds, a type of mutual fund. The minimum investment limit for retail investors to invest in a Gilt fund is Rs 5,000.

When to invest in Gilt funds
There is an inverse relationship between the bond prices and interest rates, hence a fall in interest rates, leads to rise in bond prices and vice-versa. The falling interest rates appreciates prices of the long-term bonds and other government securities. Investors should keep an eye out on the economic indicators, that's a situation when interest rates have peaked and a downturn seems certain, would be a good time to make an investment into Gilt funds.

How risky are these funds
Though gilt funds do not expose investors to any credit risk but are not entirely risk-free. Gilt funds are highly sensitive to interest rates risks. Inflationary pressure pushes interest rate up which leads to a downturn in long-term bond prices, hence Gilt funds would not do well in such situation.

Another risk is the risk of liquidity. If underlying securities like G-secs papers are not actively traded in the market, then it may affect the performance of the fund.

Investors must consult their investment advisors or financial planners before making an investment into Gilt funds.

OneIndia Money

Read more about: mutual funds, rbi, inflation, government
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