Gilt Mutual Funds: Making the Right Investment Choice

As the economy recovers and the interest rate cycle turns, investors are looking to get back in to debt funds. A good option to consider is Gilt Mutual Funds which offer a combination of decent returns and low risk, mainly due to the fact that these funds are backed by the government. However, these schemes are not risk-free and are susceptible to interest rate movements, hence they are a volatile asset class.

Gilt mutual funds invest solely in government securities and carry minimal credit risk as the government generally fulfills its obligations. However, since these investments are made in instruments with varying maturities, the returns from gilt funds depend on changes in market interest rates. When interest rates rise, prices of g-secs or government bonds fall and vice versa. This makes them an attractive investment option for those seeking lower risk with reasonable returns, compared to other bond funds which also invest in corporate bonds and FDs.

The returns from these funds are also impacted by the Modified Duration of the fund. This is a measure of how much the price of your bond will change with 1% changes in market interest rates. The higher the modified duration, the more sensitive your fund is to interest rate movement and the higher your potential loss will be.

Moreover, these funds are also exposed to liquidity risk and reinvestment risk as the money invested in them is locked up for longer periods. Hence, the fund managers must be cautious while managing these funds as there is always the risk of liquidity crunch.

These funds are a good choice for investors who want to earn a higher return than bank fixed deposits but are worried about the possibility of the rupee weakening against the dollar. This is because these funds have a history of delivering high returns during falling interest rate scenarios. However, they do not provide any guarantees for their returns and are not recommended for new investors.

Investors should consider the Modified Duration of their funds before investing in them. Modified Duration is a measure of how much the price will fall when the market interest rates rise, and it also gives you an idea about how volatile your scheme will be. It’s important to know the risk associated with a particular fund before investing in it, and if looking for other options  you can invest in money market funds. It is also an excellent option since their values tend to stay steady or even increase over time.

If you are an existing investor who wants to diversify their portfolio by adding a gilt fund, you can invest in hand-picked funds in a simple and paperless manner. You can find the best based on your financial goals and risk tolerance by answering a few quick questions. If you need any help, our investment advisors will be happy to assist you.

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