What Are Gilt Funds? Know In Detail

Gilt funds, often known as debt funds, invest primarily in government securities. The term was coined after the golden edges of the original bond certificates.

In order to comply with Sebi rules, gilt funds must invest at least 80% of their assets in government securities that pay a fixed interest rate. These funds support government infrastructure projects on both the federal and state levels. In this article, you will learn the definition of a gilt fund, as well as the foundational principles of gilt funds in India.

How Do Different Kinds Of Gilt Funds Function, And What Are They?

India has two distinct gilt fund options:

Investing in government securities of varying maturities constitutes the INE form of funds.

The other category consists of money that always matures in ten years. At least 80% of their total assets must be invested in securities with a minimum maturity of 10 years for them to qualify.

When the government of India needs money, it applies to the Reserve Bank of India (RBI) for a loan using gilt funds. The Reserve Bank of India (RBI) serves as the government of India’s lender. In order to fund government operations, the RBI takes on debt from other financial institutions including banks and insurance companies. To repay its loans to the government, the RBI issues fixed-term government securities. The managers of gilt funds invest in these government securities.

The gilt fund pays back the government securities with money after they have reached maturity. The prospect for satisfactory returns and a minimal degree of risk is what makes gilt funds appealing to investors. If you want to invest in gilt funds, it’s best to do so while interest rates are falling because their performance is highly correlated with those rates.

Why Should One Put Money Into A Gilt Fund?

The moderate returns offered by gilt funds make them a popular choice among risk-averse investors. Here are a few advantages to investing in gilt funds that you should consider:

Investors can gain access to government instruments through gilt funds, which invest in government securities that are generally unavailable to retail investors.

Since the government is a reputable issuer that is widely expected to honour its debts, investing in government securities carries very little credit risk.

Gilt funds, which typically offer fair returns at minimal risk, are a good choice for those looking to invest for the short or medium term.

Before Putting Money Into Something, Think About:

While many may be tempted by the potential profits, they should think carefully about the following issues before investing in a gilt fund:

Investment risk: Gilt funds are the most liquid financial asset and have no credit risk, in contrast to corporate bonds. Gilt funds, however, are susceptible to interest rate fluctuations. The NAV of gilt funds typically falls dramatically when interest rates are rising.

Despite the potential for large returns (up to 12%), gilt fund returns are not certain and may fluctuate with changes in the prevailing interest rate environment. Therefore, it is recommended that money be put to work while interest rates are falling. Even when the economy is down, investors anticipate larger returns from gilt funds compared to stock funds.

Expense ratios for Gilt funds cover both operating costs and the compensation of the fund’s management, and are charged annually. This is expressed as a share of the fund’s average assets. Debt fund expense ratios are capped at 2.25% by Sebi rules, however actual expenses will differ from fund to fund based on management style.

Back to top button