Investors are often in a dilemma as there are many types of investment options in the market. They are unable to decide which option would be better for them. It is important for investors to understand and know the key features of investment instruments before choosing an investment option. Knowing the features and drawbacks of investment options, investors are able to choose the right investment option for themselves. You must have heard about many types of investment instruments. One such instrument is the gilt fund. Information related to this is being given through this article.
What are the gilt funds?
A gilt fund is a type of mutual fund that invests in medium and long-term government securities. Gilt funds prove to be the right investment option for risk-averse investors. These can help investors diversify their portfolios. Gilt funds are an ideal mix of risk, returns and opportunity. Let us now see how the gilt fund works.
How Gilt Funds Work?
As we know that RBI, along with being the central bank of the country, performs many functions. It acts as a regulatory body and also plays the role of a banker to the government, so when the government needs to raise money from the market, it contacts the RBI. The RBI lends money to the government by borrowing from other companies such as insurance companies and banks. The RBI issues fixed maturity government securities to raise money from investors. Since gilt fund is a type of mutual fund. It invests in medium and long-term government securities, so the fund manager of gilt funds invests in these securities. At maturity, the investor receives interest along with invested capital. Investors can take advantage of gilt funds well, as there is no capital risk. Thus guild funds are a low-risk investment option with moderate returns.
Who should invest in gilt funds?
Gilt funds are a type of mutual fund that invests mainly in medium and long-term government securities. Gilt funds invest in low-risk debt securities, so it is an ideal investment option for investors who are concerned about the safety of capital and want a safe alternative.
Gilt funds are different from bond funds, as bond funds primarily invest in corporate bonds, government securities, and money market instruments, while gilt funds invest in securities with a high credit rating such as G-Sec. Gilt funds ensure that investors do not face capital risk and also get moderate returns. Gilt funds are known to invest in better asset quality than equity funds or liquid funds. That’s why gilt funds are the best option for investors who are looking for risk-free investments or want to invest in high quality government securities.
Keep these things in mind before investing in gilt funds
risk factor
Gilt funds are the most liquid when compared to other investments. These funds do not carry credit risk, as gilt funds mainly invest in medium and long-term government funds. Therefore it is ensured that the government will try its best to fulfill its obligations within the given time. While investing in gilt funds, the investor should take care of the interest rate regime. Because the returns from gilt funds are inversely proportional to the interest rate. Investors should avoid investing in gilt funds while interest rates rise.
Return
The returns from gilt funds are inversely proportional to the interest rate regime. Therefore, when the interest rate falls, the price of G-Sec rises, leading to better performance of gilt funds. Gilt funds perform well even when the economy is facing recession or when equity markets are not performing well.
Cost
Investors investing in gilt funds have to bear the fees of the fund manager and other related expenses. So investors have to pay an annual fee, which is the expense ratio of the fund.
Maturity period
Since these mutual funds are known to invest in medium and long term government securities, they have an average maturity period of 3 years to 5 years. If you are looking for a risk-free investment option for a period of 3 to 5 years, you can choose to invest in gilt funds.
Financial goals
Gilt funds can be an ideal option to meet your medium-term financial needs, as they provide reasonable returns and high security.
Tax
Gains from Gilt Fund are taxable like other investment options. You have to pay tax based on the investment period of the gilt fund. Income from such investments is added to your annual income and taxed accordingly.