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Being sovereign papers, they do not expose investors to credit risk (unless the government goes bankrupt!). Also, as the G-sec market is largely dominated by institutional investors, gilt Mutual Funds offer a convenient way for retail investors to invest in government securities. Gilt funds invest in government securities, which have medium to long-term maturity periods.
This is because the investors are likely to shift to newly issued securities or bonds which offer higher interest rates compared to the old ones. This further leads to falling demand in old bonds & their prices start falling. Which lowers the NAV of Gilt funds and therefore their returns would fall. These funds earn reasonable returns and help in wealth accumulation over the medium to long term.
While the beleaguered AMC’s offerings baited investors with extra returns by investing in questionable low-rated bonds, such risk is rather the exception to the rule with underlying assets of debt funds. And, if it is a gilt fund in question, which is a kind of debt fund, then the risks are much lower. The rising demand of the previously issued securities in the market results in the scenario where these bonds start trading at higher prices and therefore the NAV of Gilt funds rises.
Mutual funds have a plethora of equity and debt schemes suited for all kind of investors. Mutual fund investments are subject to market risks, read all scheme related documents carefully. The scheme invests in government securities which provide income and capital appreciation and is deemed to have no credit risk. Moreover, gilt funds are considered to be quite illiquid securities. This implies that if an investor wants to exit his position and liquidate his investments in case of an emergency, he won’t be able to do so easily.
Know more about ICICI Prudential Gilt Fund
The fund has generated above-average or slightly higher returns in the category consistently over the short as well as the long period. Out of the entire list of gilt funds available to invest in, you can choose your favorite or the safest one and invest in it. According to SEBI requirements, the maximum cost ratio is 2.25%. However, there could be a variation in the operating costs depending on the strategy initiated by the fund manager. These schemes offer double-digit returns when rates start falling or in anticipation of interest rate falls. Best gilt mutual fund because of increased chances of RBI upping the interest rates.
Furthermore, even if the economy as a whole is in a depression, gilt funds are likely to outperform even equity funds. Second, gilt funds that invest with a constant maturity of 10 years, resulting in a portfolio with a Macaulay duration of 10 years. Gilt Funds have an advantage over debt funds in terms of returns and are most suitable for risk averse investors. It is to be noted that capital gains are taxed at the hands of the investors and need to be filed at the time of filing our annual income tax returns. Here is a look at how one-year returns of gilt funds have moved historically, compared to the movements of 10-year bond yields. The graph below shows the average return of all funds in the gilt category.
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UTI Gilt Fund Direct Growth
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- Depending on the interest rate outlook, a fund manager will tend to trade in and out of gilts with varying maturities.
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- The first is a fund that invests largely in government securities of various maturities.
- Despite the ability to generate considerable returns, even going up to 12%, gilt fund returns are not guaranteed and may vary depending on the interest rate regime.
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Returns
Invest in hand-picked funds in a hassle-free and paperless manner. Gilt Funds by regulation have to invest at least 80% of their money in debt instruments issued by the government. These instruments are called G-Secs, a short form for Government Securities. However, since government borrowing is mostly for the long-term, most funds in the category end-up lending for a long duration. Some may be short term while others are medium term or long term. Like any other bond funds, these funds too have interest rate risk ingrained in them.
The Macaulay duration of a fixed income instrument is the weighted average number of years an investor must keep it until the present value of the cash flows equals the amount paid for the asset. However, the outperforming gilt funds have been generating returns in the range of around 16 percent in one year, while even the worst of the gilt fund performers have clocked double-digit returns. The chart below depicts the annualised one-year, three-year and five-year returns of the top-performing gilt funds in India in 2020.
Go for gilt funds only if you are sure of your ability to track interest rate fluctuations, and can time your entry and exit well. Government securities carry little to no credit risk since the government is a trusted issuer https://1investing.in/ and is known to follow through on its obligations, thus making it a minimal risk investment in that aspect. An investor can anytime withdraw their investment anytime from their fund as per their financial goals.
What Is Gilt Fund?
Even if the investor is investing for a short to medium period, gilt funds offer reasonable returns when compared to many other investment possibilities. This is a fantastic alternative for risk-averse investors because of the low risk. The gilt fund investors get their returns by investing in debt instruments, which create interest income. The performance of any gilt fund is determined by the direction of interest rates.
These factors make investing in gilt funds extremely tricky. You should be well-informed about interest rate changes in the economy. For example, interest rates are supposed to go up in a few months. As said earlier, this will have an adverse impact on gilt schemes. This is a long-term investment option as the period of maturity varies between 3 years to 10 years. Investors should have long term horizon if want to opt gilt funds.
What is a Gilt Fund?
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