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Gilt Funds – Overview, Investment Process, Risk and Returns

Investing isn’t rocket science, but that doesn’t mean investors should invest in any scheme without understanding its major aspects. A lot of people do not realize that investing is probably of the one most significant investment decisions of their lives and hence they must understand how much risk they can take before investing in any type of scheme. The biggest question that lies in front of first investors is whether they should choose an aggressive investment approach or stick to a conservative mode of investing. However, it is now possible for investors to adopt the conservative investment approach even after investing in modern investment avenues like mutual funds. Investors who do not wish to invest in conventional investment avenues but also want to stay away from the dangers of market volatility can consider investing in gilt funds.

What is a gilt fund?

While equity schemes invest a majority of their investible corpus in equity and equity related instruments of companies, debt funds like gilt funds aim to generate capital appreciation by investing in fixed interest-bearing securities and bonds issued by the Government of India. According to SEBI (Securities and Exchange Board of India), gilt funds “invest exclusively in government securities. Government securities have no default risk. NAVs of these schemes also fluctuate due to change in interest rates and other economic factors as is the case with income or debt-oriented schemes.

How do guilt funds work?

The GOI (Government of India) visits the RBI (Reserve Bank of India) whenever it needs cash. The RBI reaches out to banks and insurance companies for sourcing finances and then loans the money to the government. In exchange for the loan, the government issues bonds that have a fixed maturity date. A gilt fund invests in such government securities and earns returns by returning these securities upon maturity.

What are the risks involved in investing in gilt funds?

Gilt funds have almost zero risks since they invest in government back securities. Investors get an opportunity to invest in government securities to which they may not have direct access. Since the government always repays its debts, these funds do not carry any credit risk. The government is the issuer of the underlying securities and always ensures that its sticks to its obligation. This is what makes gilt funds ideal for investors with a low-risk appetite. Gilt funds have offered decent returns in the past with very little investment risk.

Who should consider investing in gilt funds?

The government backed securities in which gilt funds invest usually have a medium or long maturity period. They are far less risky than bond funds which allocate a portion of their assets to corporate bonds as well. Investors who want to invest in such fixed-interest generating government securities can consider investing in gilt funds. Not everyone wishes to risk their finances with volatile equity markets and such investors too should consider investing in gilt funds. If you are a mutual fund investor whose mutual fund portfolio is more focused on only a single asset class, you should consider adding gilt funds to your portfolio so that you get the much needed diversification.

Before investing in gilt funds, investors must first consider whether they want to invest via SIP or lumpsum option. A lumpsum investment allows investors to buy more units at the current NAV. A Systematic Investment Plan (SIP) on the other hand ensures that investors get to invest small fixed amounts at regular intervals in gilt funds. They can also decide how much they want to invest so that at the end of the investment journey, they have achieved their investment objective.

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