Stay invested for long to get most out of gilt fund investment
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It is always nice to invest in mutual funds as the money gets diversified across different securities to reduce the risk element. Fund managers undertake the task of constantly moving your investments from stocks to bonds to money market instruments and thus ensure reduction of investment risk. Broadly, mutual funds are classified into equity and debt funds. Equity funds mainly invest in stocks and equity related products, while debt funds pool the money mainly in government & corporate bonds, as well as other debt securities.
Gilt funds are the part of debt mutual funds that primarily invest in government securities. The funds also invest in state government securities and treasury bills. However, the operational methodology of gilt funds is entirely different from traditional debt funds. Where normal debt funds invest across all the debt instruments, gilt funds make investment specifically in government securities. Acting as a sovereign paper, they mitigate the credit risk of investors. Gilt funds provide retail investors an easy way and cheaper way to invest in government securities, which are purchased mostly by the institutional investors. As an investor, you can choose between short-term and long-term gilt funds based on the investment horizon you have.
Right time for investment in gilt funds
You should keep an eye on the factors that can bring down interest rates, cause slowdown in GDP growth, increase inflation, a fall in Index of Industrial Production (IIP), anticipation of a drop in corporate earnings, among others. The right time for investment in gilt funds would be when the interest rates rise and downturn looks all set to grip the economy. Also, you must stay invested for long to get the maximum out of your gilt fund investments.
- The biggest advantage is that you can invest in government securities through gilt funds at Rs 5,000. The minimum limit for investment government securities stands at Rs 5 crores.
- Gilt funds invest across different government securities offering varying returns when you route the investment through fund managers. So, the diversification element is taken care of and you get good returns.
- Gilt funds are not fully secured as the rise in interest rates bring a fall in the prices of government securities and thus adversely affect the performance of gilt funds you may have invested in.
- Gilt funds are vulnerable to volatility risks with higher average maturity period of the fund
- Gilt funds are liquid assets as they invest only in government securities that are not actively traded.
Now you have got the information to take a call on the adoption of gilt funds. Decide to go with gilt funds after assessing your risk profile, investment horizon, investment objective and the current portfolio. For existing investors, make sure you stay invested for long to get the right return on your investment.