Mutual funds are largely categorized as equity and debt. Although there are several other mutual fund categories equity and debt are two of the most sought after investment avenues. Equity funds are best suited for investors with a very high risk appetite and a long term investment horizon. These schemes predominantly invest in equity and equity related instruments to generate capital appreciation. Debt funds on the other hand invest in bonds, corporate securities, debentures, repo rates etc. to help the scheme earn returns.
A well-diversified mutual fund portfolio has the right mix of equity and debt. If you have an equity heavy portfolio and looking for a debt scheme that is relatively safer as compared to other mutual fund schemes, you can consider investing in gilt funds.
What is a gilt fund?
A gilt fund is an open ended debt scheme which predominantly invests in government securities to achieve its investment objective. Since gild funds invest majority of its assets in government backed securities, they are considered to be the safest investment product in the debt scheme category. The underlying securities of a gilt fund may hold an average maturity period of they may vary from medium to long term. Since the average maturity period of a gilt portfolio spans over medium to long term, they are ideal for investors with a long term investment. Although gilt funds are considered to be a safe investment option, they aren’t entirely risk free. Since they have a long maturity rate, the performance of a gilt fund may get affected by fluctuations in the interest rates. When there is a noticeable fall in the interest rates, gilt funds tend to offer better returns. Likewise, a rise in the interest rates can make gilt funds a volatile investment.
Why should you invest in gilt funds?
Here are 5 primary reasons why you should invest in gilt funds –
Invest in government backed securities
As mentioned earlier, gilt funds invest in government backed securities. A retail investor may not have the resources to directly invest in such government securities. By investing in gilt funds, investors get an opportunity to gain exposure to instruments which otherwise they have no access to.
Almost zero credit risk
Government always pays back all the money that it borrows. This makes investments in glit funds almost risk free. Investors who do not wish to risk their finances with volatile investments can consider investing in gilt funds. These funds invest in securities which have a very high credit rating and investors may not have to worry about losing their money by investing.
Better capital appreciation
Gilt funds have offered far better returns than any other debt scheme. In the past gilt funds have offered double digit returns. Some have even performed better than equity funds which makes them a safer investment scheme delivering better returns than high risk investment avenues.
Target long term goals
Gilt funds aren’t like other debt funds which are usually considered by investors to tend to their short term financial goals. Investors who have a long term investment horizon but do not wish to invest in equity funds due to their volatile nature can consider investing in gilt funds.
Invest in a systematic manner
Investors can invest in gilt funds via SIP. Systematic Investment Plan is an investment approach where retail investors can save and invest a fixed sum at regular intervals till their investment objective is accomplished.
Gilt funds may invest in government securities, but they aren’t entirely risk free.