Origin of Gilts
Gilts originated in Britain.
The first gilt fund in India was set up in December 1998.
The first gilt fund in India was set up in December 1998.
Performance of Gilt Funds
Many investors in long-term gilt funds and income funds are wondering whether to take profit or stay invested after the recent rally in the bond markets. These investors have been betting on these funds to take advantage of falling interest rates in the last one year. The strategy has paid off and many funds have returned around 15% in last one year. It is typical for a long term fund to give you great returns in a market where interest rates are falling.
What are Gilt Funds
These are mutual fund schemes that invest in government securities (G-Secs), issued by the Reserve Bank of India on behalf of the government. Gilt funds, as they are conveniently called, are mutual fund schemes floated by asset management companies with exclusive investments in government securities. The schemes are also referred to as mutual funds dedicated exclusively to investments in government securities. Government securities mean and include central government dated securities, state government securities and treasury bills. The gilt funds provide to the investors the safety of investments made in government securities and better returns than direct investments in these securities through investing in a variety of government securities yielding varying rate of returns gilt funds.
These are mutual fund schemes that invest in government securities (G-Secs), issued by the Reserve Bank of India on behalf of the government. Gilt funds, as they are conveniently called, are mutual fund schemes floated by asset management companies with exclusive investments in government securities. The schemes are also referred to as mutual funds dedicated exclusively to investments in government securities. Government securities mean and include central government dated securities, state government securities and treasury bills. The gilt funds provide to the investors the safety of investments made in government securities and better returns than direct investments in these securities through investing in a variety of government securities yielding varying rate of returns gilt funds.
Risk in Gilt Fund Investments
Being sovereign papers, these do not expose investors to credit risk. Conventional debt funds invest in debt instruments across the board, but gilt funds invest only in government bonds. The G-Sec market is largely dominated by institutional investors and gilt funds are an avenue for retail investors to participate in the market.
Are Gilt Funds and Bonds different
Gilt funds differ from bond funds because bond funds invest in corporate bonds, government securities, and money market instruments. Gilt funds stick to high quality-low risk debt, mainly government securities.
Who should invest?
These are ideal for those who want more safety for their investments or are risk-averse and, at the same time, are looking for reasonable returns on their money. In the present scenario, fund managers advise investing for medium (3-5 years) to long-term (above 5 years). However, invest in tranches to avoid over-exposure and associated risks
When should you invest?
These are a good option when inflation is near its peak and the RBI is not likely to raise interest rates (Reverse Repo rates) immediately. There is an inverse relationship between bond prices and interest rates — a fall in interest rates (Reverse Repo rates) leads to a rise in government bond prices and vice-versa. Since rates are expected to peak soon, we may see a dip in interest rates in six months. A dip in interest rates for the new bonds would make the existing government bonds (with higher interest rate) more precious and more in demand, thereby increasing its price. That will be the ideal time to invest in these funds.
Are gilt funds completely risk-free?
No, these don’t even assure returns like those offered by bank fixed deposits and savings accounts. The government securities run price risk like any other fixed income security. Factors such as fiscal deficit and the country’s debt burden weigh on the performance of G-Secs and hence, gilt funds. Investment in gilt funds is subject to interest rate risks. When interest rates rise, prices of government securities fall, adversely impacting the performance of gilt funds. Typically, higher the fund’s average maturity, higher the volatility.
Types of Gilt Funds
Types of Gilt Funds
Most of the gilt plans offer two plans to the investor, short-term plan or the treasury plan and long term plan also called as investment plans. Treasury plan usually invests in gilts with a short maturity of 6 months to 2 years or in call money. They have a highly liquid portfolio, carry lower risk and at the same time deliver lower returns. These plans are suitable for investors with a short to medium term time horizon of 6 months to one year. In contrast, investment plans invest in gilts of maturity more than 2 years. Long-term gilt funds invest in papers with a maturity period as high as 25 years. Investment plans generate higher returns and are more susceptible to volatility arising due to interest rates. Such plans are suitable for investors with a longer investment horizon of more than 2 years.
What is the liquidity for Gilt Funds
Another disadvantage of Gilt funds is that they are highly illiquid. These funds invest in G-Secs, which are not actively traded.What is the liquidity for Gilt Funds
What are the applicable charges?
Gilt funds charge an exit load of one per cent if you redeem the units in less than a year.
How are investments taxed?
If you sell the unit in less than a year, the returns are added to your income and taxed according to the slab you fall under (short-term capital gains tax). Long-term capital gains tax is 10 per cent without indexation and 20 per cent with indexation. These are debt funds and not subject to the securities transaction tax.
- The minimum investment amount in gilt funds is Rs 5,000-10,000.
- Since gilt funds are open ended, the investor can exit or withdraw anytime subject to an exit load.
- Typically gilt funds offer investors two options, the growth option and dividend option. Under the dividend plan, the fund would declare dividends from the net income earned by way of interest and capital gains (appreciation in the prices of the government security when the interest rate falls). Under the growth plan, these payouts would be reinvested.
Cheers
Manoj Arora
elevate your life...
Life's_Mission | Blog | FanPage | Officialebsite | LinkedIn | YouTube | Twitter | GoodReads | Quora | Whats-App
More on "From the Rat Race to Financial Freedom"
Books to elevate your life
No comments:
Post a Comment