What Are Gilt Mutual Funds and Who Should Invest in Them

There is a plethora of investment schemes to choose from, that doesn’t mean investors should go on a spree and invest in every scheme that they find lucrative. Before investing, one must make sure that they have a good financial plan. Financial planning is understanding your short term and long term financial goals and prioritizing them according to your expectations. Those with a good financial plan generally excel at investment planning. Once you learn how to manage your money, you become a much wiser investor.

Mutual funds are a pool of professionally managed funds that are gaining traction among young Indian investors. These are market linked schemes that aim at generating capital appreciation over the long term. Depending on the nature of the scheme and its investment objective, a mutual fund may invest in equity, debt, corporate bonds, government securities, call money, company fixed deposits, commercial papers, treasury bills, etc. Mutual fund investors are generally allotted units in quantum with their investment amount and depending on the fund’s existing net asset value (NAV).

Market regulator SEBI has further classified mutual fund schemes to help investors make an informed investment decision. The purpose behind this categorization is to bring all similar schemes under one uniform umbrella. Mutual funds are categorized based on certain unique attributes like investment objective, risk profile, asset allocation strategy, etc. Some of the major mutual fund scheme categories include equity, debt, solution oriented, ETFs, gold, hybrid, etc.

What are gilt funds?

Gilt funds fall under debt mutual fund scheme category. While equity mutual funds invest predominantly in equity and equity related instruments, debt funds invest majorly in fixed income securities for income generation. Guilt funds are those debt schemes that invest in high rated fixed income securities like central and state government bonds.

Here’s how gilt funds aim at generating capital appreciation

When the Indian government needsfunds, they approach the Reserve Bank of India (RBI). The RBI then reaches out to insurance companies and banks for seeking the desired capital, loans it from them and then lends it to the Government of India. In exchange for their loan, the government issues certain fixed income securities. The duty of a gild fund manager is to invest in these fixed income securities issued by the government.

Should you invest in gilt funds?

Whether an individual should invest in gilt funds can vary depending on several factors including who that person is, what is their current age, their income, existing liabilities, what are their immediate income needs etc.  Here are few things to keep in mind before investing in gilt funds –

Understand your income needs

Do not invest in a gilt fund by getting smitten away by the scheme’s investment objective. Investors must not forget their own investment objective while picking investment schemes. It is essential for your investment objective to align with that of the financial instrument you are about to invest in.

Understand your appetite for risk

Now do remember that just because debt schemes are less volatile than equity funds, that doesn’t mean they are entirely risk free. No investment is considered to be a risk free investment. Gilt funds are prone to credit risk and interest rate risk. If the government isn’t able to repay the loans in due time, there is a good chance of your gilt fund portfolio facing losses. Hence, investors are expected to first determine their appetite for risk before investing.

Gilt funds offer the option of SIP investment. A Systematic Investment Plan is a convenient way to make small investments at regular intervals in gif funds. One can even refer to an online calculator to understand how much they need to invest at regular intervals to get closer to their financial goals.

Kamlesh Bakshi