Read on to find out how gilt funds work
Gilt funds are mutual funds that predominantly invest in government securities (G-Sec). Unlike conventional debt funds that invest in debt instruments across the board, gilt funds target only one debt instruments i.e. government securities. These securities are issued by the Reserve Bank of India (RBI) on behalf of the Government of India. Being sovereign paper, they do not expose investors to credit risk. Since the market for G-Sec is largely dominated by institutional investors, gilt funds offer retail investors a convenient means to invest in G-Sec.
|
Scheme Name |
Total AUM (Rs. in crore) |
1 Year Return |
3 Years Returns |
5 Years Returns |
|
Tata Gilt SMF (G) |
282.95 |
3.42 |
6.30 |
5.98 |
|
Birla SL G-Sec-LT (G) |
258.48 |
9.31 |
10.68 |
8.08 |
|
UTI G-Sec-Invest (G) |
221.73 |
1.30 |
3.13 |
3.84 |
|
Templeton India G-Sec-Treasury (G) |
158.45 |
2.83 |
4.65 |
4.85 |
|
ICICI Pru Gilt-Treasury (G) |
157.24 |
3.49 |
9.39 |
8.24 |
|
ICICI Pru Gilt-Invest (G) |
145.31 |
3.01 |
10.97 |
9.39 |
|
Principal Govt Sec Fund (G) |
143.73 |
2.43 |
5.76 |
5.55 |
|
Birla SL Gilt Plus-Reg (G) |
111.04 |
1.35 |
7.74 |
7.51 |
|
UTI Gilt Adv-LTP (G) |
89.04 |
3.38 |
7.53 |
6.50 |
|
ICICI Pru Gilt-Invest-PF |
74.67 |
3.28 |
14.67 |
11.88 |
* Disclaimer: Only top 10 schemes as per AUM are displayed.
Source: Accord Fintech As on 25th Nov, 2010
Pricing of debt securities depends on the relationship with the interest rates. The two are inversely related. Hence a fall in interest rates leads to a rise in bond prices. In recent times, the RBI has undertaken a series of rate hikes to curtail liquidity and inflation. The rising interest rates have translated into dampening of prices of long-term bonds and G-Sec alike. But as the inflation falls back into range of 5-6%, there would be cuts by RBI making this a good time to recommend these funds to your clients.
One should look for indicators that can give cues to a fall in interest rates i.e. slowdown in GDP growth, a decline in IIP (Index of Industrial Production) and expectations of a fall in corporate earnings are a few examples.
Gilt funds are being promoted by fund houses by emphasizing on their risk free nature. That isn't entirely correct. We have already discussed how the underlying instruments i.e. G-Sec do not expose investors to any credit risk. However, this doesn't make gilt funds entirely a risk free investment.
For instance, investments in gilt funds are exposed to interest rate risks. As we saw earlier, when interest rates rise, prices of government securities fall; this in turn has an adverse impact on the performance of gilt funds. Higher the fund's average maturity, more is it prone to volatility.
Conclusion:
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Gilt funds are suitable for risk-averse investors. Securities which are held by these schemes are backed by the Indian Government.
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Gilt funds give investors exposure to Government securities. Such securities are normally issued in large denominations making it possible only for institutional investors and HNIs to invest in them. But a gilt fund makes it possible for retail investors to participate in them by investing small amounts.