What is a Gilt Fund?
Investing wisely involves understanding various types of financial instruments and how they align with an individual’s financial goals and risk tolerance. For many investors, the prospects of earning attractive returns with low risk are the first choice. This is where Gilt Funds come into the picture.
In this blog, we will explore what is Gilt Fund, their salient features, benefits and who should consider investing in it.
Overview of the Gilt fund
A Gilt Fund is a debt mutual fund that primarily invests in bonds and fixed interest-bearing securities issued by the central and state governments of India. The term Gilt itself denotes the government securities, which are considered sovereign instruments. These securities are also known as G-Secs and are the debt obligations of the Government of India. When the government needs funds, it borrows funds by issuing these sovereign bonds.
The Reserve Bank of India (RBI) monitors these offerings and collects funds from various entities like banks and insurance organisations and lends it to the state or central governments. In return, the RBI conducts auctions of G-Secs. Gilt funds purchase these securities through primary dealers and the secondary market. Once the security matures, the fund returns it and receives a payout.
Gilt Funds are different from other bond funds as they invest solely in government securities, as opposed to other bond funds that may also invest in corporate bonds. This sole focus on government-issued instruments is what makes Gilt Funds low-risk investments.
Key features of Gilt funds
Now you know what is Gilt Fund. So, let understand its features. Gilt Funds offer several unique features that make them appealing to investors. Some of these features of gilt funds are:
Low credit risk
A key feature of Gilt Funds is that they carry low credit risk as the underlying securities are issued by the Indian government.The government is unlikely to fail in its obligations to repay the debt. This makes them suitable for investors who prioritise capital preservation with moderate returns.
Interest rate sensitivity
While Gilt Funds have a low degree of credit risk, they are highly sensitive to fluctuations in interest rates. When the interest rates increase, the net asset value (NAV) of Gilt Funds tends to decrease and vice versa. This is because the market value of existing bonds with lower interest rates declines due to the issuance of new bonds with higher interest rates.
Maturity periods
The Gilt Funds invest in government securities of varying maturities. These may be of a medium to long-term nature, i.e. usually from three years to five years. Thus, offering investors the flexibility to choose depending on their financial condition.
Professional management
Gilt funds are managed by experienced fund managers, thus providing professional management of government securities portfolios. These fund managers actively manage duration, select securities, and execute trades to optimise risk-adjusted returns.
Exposure to government securities
Gilt Funds offer retail investors an accessible way to invest in government sovereign securities, even with smaller amounts. This provides exposure to instruments that might otherwise be out of reach for individual investors.
No lock-in period
Most Gilt Funds do not have a mandatory lock-in period, i.e. an investor can withdraw their funds from a Gilt Fund at any time. Thus, investors should check the investment terms of any given fund prior to making an investment decision.
Expense ratio
Similar to all other investment funds, Gilt Funds also impose an annual fee, known as an expense ratio. This fee goes towards paying the fund manager's fees, as well as other operational expenses. As per SEBI specifications, the maximum limit of expense ratio in the case of debt funds is 2%. The actual cost of operation can vary depending on the investment strategy implemented by the fund manager.
Benefits of investing in Gilt funds
Investing in Gilt funds on Dhan has several advantages, especially for conservative investors. Some of these benefits are:
Capital preservation
Due to the sovereign guarantee of government securities, Gilt Funds are one of the safest modes of investment. This makes them an attractive option for investors who are more interested in preserving capital than in aggressive growth.
Attractive returns
While Gilt Funds are low-risk, they are also intended to offer reasonable returns. Gilt funds aim for stable, market-linked returns and may outperform fixed deposits during falling interest rate cycles, but returns are not guaranteed.
Liquidity
As compared to corporate bond funds, Gilt Funds are more liquid instruments, as they do not have credit risk. Government securities can be easily sold in the secondary market to meet cash requirements.
SIP investment option
Investors can also invest in the gilt funds through Systematic Investment Plans (SIPs), for which they can benefit from the rupee cost averaging across various interest rate cycles. Thus, investors do not need to time the market, making investing in gilt funds more accessible with modest monthly investments.
Calculate your maturity amount from guild funds using the online SIP calculator.
Diversification
For investors having their core portfolio holdings in equities, Gilt Funds can offer valuable diversification. Their low correlation to equity markets helps to balance the overall risk profile of a portfolio.
Transparency
The G-Sec market is highly transparent, with prices being available easily due to an active secondary market and a clear price dissemination mechanism.
Who should invest in Gilt funds?
Gilt Funds offer several benefits to investors. They are best suited for the following types of investors:
- Risk-averse investors: Those who have a low-risk tolerance and are more interested in the safety of their capital, rather than high returns.
- Investors seeking diversification: Those who are seeking to diversify their portfolio and minimise overall risk can invest in Gilt Funds to balance out volatile investments in their portfolio.
- Investors with a long-term horizon: Gilt Funds invest in securities with maturities between medium and long term, which makes them ideal for investors with an investment horizon of at least three to five years.
- Investors looking for safer havens: Investors often turn to Gilt Funds during periods of economic uncertainty or volatility, as they are considered a safer haven.
- Those anticipating interest rate declines: Gilt Funds tend to perform better in falling interest rates. Thus, investors who are anticipating RBI rate cuts or expecting lower yields can make tactical investments in the Gilt funds to gain from capital appreciation.
Conclusion
Gilt Funds offer a unique investment option for Indian investors. They offer a combination of the government-backed G-secs and the potential of attractive returns. Their low credit risk, high liquidity and ability to diversify portfolios make them an attractive choice for investors who are risk-averse or looking to diversify their portfolios.
By understanding the above-mentioned aspects of the Gilt Funds, investors can strategically include the Gilt Funds in their financial planning to achieve their investment objectives with lower risk.
FAQs
What is the difference between a Gilt Fund and other debt funds?
The main difference between them lies in their investment mandate. Gilt Funds are a special category of debt funds that invest only in government securities (G-Secs) issued by the central and state governments and, thus, make them virtually risk-free of credit risk. In contrast, other debt funds invest in a wider range of debt instruments like corporate debt, money market instruments and other fixed income instruments that have a higher credit risk depending on the issuer.
What are Government Securities (G-Secs)?
G-Secs are the Government securities or the tradable instruments issued by the Central Government or the State Governments representing the obligation of the government to pay the debts. They can be short-term (Treasury Bills) or long-term (Government bonds or dated securities). In India, the Central Government issues both, whereas the State Governments issue only bonds or dated securities known as State Development Loan (SDLs).
Are Gilt Funds suitable for short-term investing?
Gilt Funds are funds that invest in Government securities with a medium to long-term maturity period, with an average portfolio maturity between three and five years. While there is no lock-in period, their sensitivity to changes in interest rates means that short-term investments may be at risk of higher volatility in returns. For short to medium term wealth accumulation, especially in times of market downturns or volatility in interest rates, they could be considered, but an investment horizon of at least three to five years is often required to deliver better results.
Can I lose my principal amount in gilt funds?
Not permanently due to default (since the government guarantees repayment), but yes, you can suffer a temporary capital loss due to interest rate fluctuations. While the underlying government securities will always honour their face value at maturity, the NAVs of the gilt funds fluctuate daily based on interest rates in the market. However, if you stay invested, over time, as bonds get close to maturity and accrue interest, values tend to recover. The key is having a long-term investment horizon.
How can I invest in Gilt Funds?
You can invest in Gilt Funds through AMC websites or brokers such as Dhan. For investing in the Gilt funds on Dhan, you must create a demat account and then complete the Know Your Customer and other details. After you finish the entire process, you can add funds and start your investing journey in gilt funds.
