What are Gilt Funds?

Posted By:
Subscribe to GoodReturns

Investment in debt market in India is not popular among individual investors.  One of the very safe securities which are traded in Debt market is government backed securities and treasury bills of various maturities.These securities are backed by sovereign guarantee and generate almost credit risk free returns.

Main players in the debt market are big institutions and banks as the minimum investment limit is very high (round 5 crores for Gilts) but Individual investors can invest in these securities through gilt funds run by various mutual fund houses. In this article we will try to explore gilt funds as an investment option.

What are Gilt Funds?

What are Gilt Funds?

Gilt funds are debt mutual funds which invest in government securities issued by the Reserve Bank of India like central and state government dated securities and treasury bills. These mutual fund schemes are different from other debt schemes in the sense that the portfolio of investment only includes Government Securities (G-Secs).

What about the risk?

These securities are backed by sovereign guarantee hence there is almost zero probability of default. These instruments are credit risk free in normal circumstances but there returns in situations like war cannot be predicted. G-Secs are credit risk free but there are other types of risk involved which should be taken into consideration. Some of them are
1. No guarantee of returns - The returns are volatile and not fixed like bank or corporate FD's.

2. Liquidity risk - These funds are thinly traded and investor might face liquidity issues during the tenure of the investment

3. Interest Rate Risk - Government securities are sensitive to interest rate changes and the sensitivity increases with the maturity. If the interest rate scenario is not favourable return on investment might not be as expected.

4. War, political instability and Natural Calamity - These are the situations in which the government might default on its obligations. In such situations your investment might become worthless.

This is a rare scenario and should be given least importance as in such situation almost all investment options will get worthless.

What are the additional costs involved?

There are two types of costs involved which eat away your returns. First is the Exit Load (round 1%) which is charged by the fund houses if you choose to redeem your investment prior to one year. Second is the taxation costs both in short term and long term. Short term capital gains are taxed as per your tax slab and long term capital gains are taxed at 10% without indexation and at 20% with indexation.

Historical Performance

Last two years performance has been quite good (in the range of 10% to 14%) for gilt funds but the return of past five years is not impressive and is somewhat comparable to bank fixed deposits (in the range of 8% to 9%). But investment returns are proportional to its timing. If you understand the interest rate cycle well, you can gain a lot by timing your investment with changing interest rates.

Who should invest?

Gilt funds are suitable for risk-averse investors who are happy with interest income every six months. Gilt fund investment is not as boring as it sounds as there in another interesting way to generate return (which is quite substantial at times) if you understand the interest rate cycle. Prices of these funds are inversely proportional to prevailing interest rates so you can earn in the form of capital appreciation too. Sell them when the interest rates are low and buy them when the interest rates are high.

InvestmentYogi.com

Read more about: gilt funds, investment
Story first published: Saturday, March 16, 2013, 12:33 [IST]
Please Wait while comments are loading...
Company Search
Enter the first few characters of the company's name or the NSE symbol or BSE code and click 'Go'

Thousands of Goodreturn readers receive our evening newsletter.
Have you subscribed?