Do you know about Gilt Fund ?

What is Gilt Fund? This question every time flash in our mind whenever we hear about it on business news channel or business news paper. Now a days it is the flavor of season as equity market has not given impressive return as expected from almost 5 years. According to recent data, now the retail people are also increasing their participation in debt mutual fund day by day. In India, debt market knowledge is still in very nascent stage among investors.

So it is very important to understand the product before investing. At least you should have basic understanding about the product. Without proper knowledge and understanding of the product often don’t prove a good return investment.

Gilt funds are fixed –income mutual funds that invest in G-secs (government securities). Bond prices and interest rates are inversely related. When interest rate falls, bond prices rise. In current scenario, falling in interest rate return expected so these funds may be prove good investment.

These funds invest in G-secs from as low 2 year to 15 year. There are basically 2 most frequently used terms, average maturity and duration. Average maturity reflects the tenor of a gilt fund’s portfolio and duration measures the sensitivity against the interest rate movement. At the time of interest rates fall, long term bond and G-secs give more return than short term bonds. Now, it is clear that high duration bond react more to interest rates movement.

Most advisers promote it as a risk free fund but it is not true. Investments in gilt funds are always vulnerable to interest rate risks. So if interest rates are moving upward direction then long term duration bond may be erode your capital or give you negative return also.

Now the question arises, when should person invest in these funds?  A slowdown in GDP growth, rising inflation, a poor IIP (Index of Industrial number these all are indication of high interest rates. Whenever you feel, the interest rates would fall in near term that time is good time to invest in these funds. In a nut shell, you should have better understanding of interest rate cycle and economic environment of the country. If you hold the fund for the defined average maturity, you will not lose your money likely.

For more detail about any other query related investment, you can contact me through my email.

Regards,

Arvind Trivedi

Certified Financial Planner

arvind.trivedi79@gmail.com