Gilt funds have caught the fancy of the investors recently. Why, one may wonder. The recent mayhem in the debt funds industry and the decent returns yielded on gilt funds are the two primary reasons for it. While gilt funds have little to no credit risks, they are not oblivious to interest rate or duration risks. This is the reason why experts suggest long-term investors to invest in gilt mutual funds via SIP. But, before we delve deeper into that, let’s quickly recall what gilt funds are.
What is a gilt fund?
Gilt funds are a type of mutual funds that invest a majority of their corpus in Central Government securities or State Government securities (G-secs) that produce a fixed-income interest. When the government entails funding, it borrows from RBI (Reserve Bank of India), the central bank of India. To meet funding needs, RBI further accumulates the essential amount from banks and insurance companies, and routes it to the government. In exchange for such funding, the RBI issues g-secs of fixed-income tenure on behalf of the central government. Gilt funds invest in these securities. On maturity, gilt mutual funds return the g-secs and investors receive a payout in exchange.
The SIP route for investment
The Systematic Investment Plan is a decent route for long-term investors looking to invest in gilt funds. Though SIP investments are often linked to equity investments that works on the belief of rupee cost averaging due to volatility experienced in the equity markets, the rupee cost averaging concept can work on gilt mutual funds as well. Though to a smaller extent. SIP mutual funds are believed to deliver better returns that lumpsum mode of investment only when a dip is experienced during the investment tenure.
In case of rising interest rates situation, investing in gilt funds via SIP mode of investment makes sense due to the interest rate volatility and drop in prices. To diversify one’s investment portfolio, one must consist gilt funds as a part of their portfolio. SIPs are preferred for gilt funds as longer duration funds add a sense of credit risk. What’s more, for events when the economy goes into a recession, investments in gilt funds can act a stabiliser for the investment portfolio.
What should you do as an investor?
If you choose to invest in gilt funds via SIP for a long term, you must be able to stomach the volatility, and not get carried away from the ups and downs of the Net Asset Value (NAV) of a fund. Also, you must consider the tax implications of your mutual fund investment when you decide to redeem your mutual funds. This is because debt funds are tax efficient after a period of three years. Additionally, SIPs regularly allocate a part of your savings to mutual funds. This instils a sense of financial discipline among investors.
As a thumb rule, when you invest in mutual funds, make sure to align your financial goals, risk profile, and investment horizon with that of the fund’s objectives. Happy investing!