Are gilt funds a safe investment option?

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There are debt funds which invest in different fixed income securities and money market instruments to achieve their investment objective. Gilt funds are debt schemes which predominantly invest in securities issued by the Central and the State Governments across the country. The investment objective of a gilt fund is to generate stable returns without risking the finances of its investors. Basically, a gilt fund invests in GOI (Government of India) securities. These securities are usually issued by the Reserve Bank of India on behalf of the Indian government. 

What is a gilt fund?

Gilt funds invest a majority of its investible corpus in government securities, thus making them a safer investment avenue as compared to other debt funds. The maturity period of the underlying securities of a gilt fund may vary from medium to long term. This is also the reason why over the short term, gilt funds are considered to be the riskiest among debt mutual funds. The underlying securities which construct a gilt fund’s portfolio are prone to interest rate risk. When there is a sharp fall in the interest rates, gilt funds may be able to perform better. On the contrary, a rise in the interest rates can make gilt funds a volatile investment.

Those to wish to earn capital appreciation by investing in government securities can consider adding gilt funds to their investment portfolio. But they must also need to have a minimum investment horizon of three to five years so that the gilt scheme in which they’ve invested is able to perform to its fullest potential.

Benefits of investing in gilt funds

As stated earlier, gilt funds invest in government securities which have a high credit rating. This makes them much safer investment and free from credit risk. Investing in gilt funds actually opens a window of opportunity for investors to invest in government securities which they cannot invest in directly otherwise. To invest directly in government securities, investors may need to have a large corpus but with gilt funds they can invest small amount and invest in a diversified portfolio of GOI securities. 

Investors seeking moderate returns with minimum investment risk can consider investing in gilt funds. Gilt funds may not be able to offer returns as high as equity schemes, but they aren’t volatile like equity funds either. Instead, the duty of a gilt fund manager is to build a portfolio of underlying securities such that the scheme is able to generate stable returns without taking any added risks.

Things to consider before investing in gilt funds

Although gilt funds do not have any credit risk because they invest in government backed securities, their performance can get affected by a sudden risk in interest rate.  A sudden rise in interest rate risk can affect a gilt fund’s NAV (net asset value). Investors must understand that they may have to remain invested in gilt funds for a minimum period of 3 to 5 years. To allow one to continue investing in a disciplined manner one must consider starting a SIP in gilt funds. Systematic Investment Plan (SIP) is a simple and convenient way of ensuring that you save and invest a fixed amount at periodic intervals in gilt funds. If you are unsure about how much monthly SIP sum should suffice to help you with your investment objective, please consider using an online SIP calculator, a free online tool accessible to everyone. 

Also, one should only consider investing in gilt funds if their investment objective synchronizes with that of the scheme.