Are Gilt funds Safe? Should you invest in gilt funds? - A complete guide

Prasanth Menon

17 Jul 2017

New Page 1

Of the several mutual fund's product categories available in the market, gilt funds are probably the least understood product category. Many retail investors stay away from gilt funds and many others have wrong strategies when investing in gilt mutual funds. Gilt funds invest in Government securities or bonds with varying maturities.

Misconceptions about Gilt Funds:

Gilt Funds are Risk-free investments: While the Government securities themselves are risk-free with respect to interest and principal payments, the price of the securities fluctuates with changes in the yields or interest rates.

Gilt Funds are as risky as equity funds: Gilt Funds are more volatile than other debt fund categories because if interest rates go up, the NAVs of gilt funds will decline and it is even possible to get negative returns in the short term. However, unlike Equity funds, Gilt funds will secure the principal amount at least.

Now that you are aware of the concept of Gilt Funds let’s take a look at their feasibility as investments.

Reasons to Invest in Gilt Funds

The 10-year Gilt yield has been on a decline from around 9% from 2014 onwards. There are several macro-economic reasons for the decline and there are enough reasons to believe that it will continue to decline further.

Lower Fiscal Deficit: As per the latest economic estimates, the Government is on track to meet its fiscal deficit target this financial year. Lower the fiscal deficit, lesser is the Government’s need to borrow money and hence, we can see lower yields and higher Gilt prices in the future.

Lower Inflation: Inflation has a direct impact on Gilt yields. Lower inflation will encourage the RBI to further reduce repo rates to stimulate demand in the economy. Falling crude prices have lowered Wholesale Price Inflation considerably this year. The long-term inflation target of 5% is also achievable, albeit there are certain risks of not meeting it.

Accommodative Monetary Policy Stance of RBI: The RBI is committed to reducing interest rates, to spur economic growth, provided inflation remains in check within the policy parameters. This augurs well for Gilt Fund investors in the long term, the short-term volatility not withstanding.

Indian economy is structurally strong: A number of global reports have suggested that the Indian economy is structurally strong, at a time when the global economy is going through a period of tumult. In fact, many reports from leading institutions have predicted that India will be a strong outperformer, in terms of GDP growth over the next few years. This will put lower pressure on fiscal deficit and consequently Gilt yields.

That the macros of the Indian economy are strengthening over the past few years is evidenced by the returns of Gilt Funds over the last 3 to 5 years. Top performing Gilt Funds have given excellent returns over the past three to five years.

In a nutshell

Given that there are widespread expectations for the interest rates to fall in the coming quarters, you could do well by investing in gilt funds.

But remember, you would need to move out before the rate reversal. If you are comfortable tracking and analysing the trajectory of interest rates, you can consider investing in gilt funds opportunistically. For most other retail investors who find it too difficult, other types of debt funds are a better option.

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Why to Choose Mutual Funds Instead of Directly Investing Into Equities?

Whether to invest in equities or mutual funds is a question that has plagued every investor. As someone who needs the best value for his/her investment should you invest in equity directly or via mutual funds?

Let’s start by first understanding what these two terms ‘equities’ and ‘mutual funds’ stand for-

Equities- Equities generally represent ownership of a company. If you own any equity in a company, you are a part owner of the said company (depending on how much equity you own).

Mutual Funds – It is an investment scheme which is professionally managed by an asset management company. It pools together the resources of a group of people and invests their money in equities, debentures, bonds and other securities.

Why choose mutual funds over equities?

For people who’ve never invested in either stocks or mutual funds, it is hard to know which is better and where to start. Broadly speaking, if you are a novice investor, mutual funds are not only less risky but also way easier to manage. Here are some ways in which investing in mutual funds is beneficial as opposed to investing in equities -

Diversification

Mutual funds provide more diversification as compared to an individual equity stock. When you invest in equity, you are investing in a single company which has its inherent risk. For example, if you invest Rs.20,000 in buying equities of one company, you could face a total loss if that particular company performs poorly in the market.  

If you invest the same amount in mutual funds, it will be invested in different kinds of stocks and financial instruments, high-risk and low-risk both, so you might not face total loss even if one company does poorly.

Scale of Investment and Lower Costs

For an individual investor buying and selling stocks is a difficult task due to its high price. Thus, any gains made from stock appreciation are nullified if the overall trading costs are considered. Comparatively with mutual funds, as the money is pooled from a large number of investors, the cost per individual is lowered.  

Another advantage of mutual funds is that you don’t need to invest large sums of money. Buying equities for a profitable venture needs huge amounts of money, a minimum of few lakhs. With mutual funds, you can start with Rs.1000 and earn profits on that as well.

Convenience

Keeping an eye on the markets everyday is a time-consuming business, especially if you are investing as a side gig. There are people who spend their lives studying the market and still end up sustaining heavy losses. Though investing in mutual funds does not guarantee high returns, it is stress-free and needs less work as compared to investing in equities.

To sum it up

It is important to remember that mutual funds have their own disadvantages as well. Thus, as with any financial decision, educating yourself and understanding the suitability of all the available options is the ideal way to invest. 


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Are Gilt funds Safe? Should you invest in gilt funds? - A complete guide

Prasanth Menon

17 Jul 2017

New Page 1

Of the several mutual fund's product categories available in the market, gilt funds are probably the least understood product category. Many retail investors stay away from gilt funds and many others have wrong strategies when investing in gilt mutual funds. Gilt funds invest in Government securities or bonds with varying maturities.

Misconceptions about Gilt Funds:

Gilt Funds are Risk-free investments: While the Government securities themselves are risk-free with respect to interest and principal payments, the price of the securities fluctuates with changes in the yields or interest rates.

Gilt Funds are as risky as equity funds: Gilt Funds are more volatile than other debt fund categories because if interest rates go up, the NAVs of gilt funds will decline and it is even possible to get negative returns in the short term. However, unlike Equity funds, Gilt funds will secure the principal amount at least.

Now that you are aware of the concept of Gilt Funds let’s take a look at their feasibility as investments.

Reasons to Invest in Gilt Funds

The 10-year Gilt yield has been on a decline from around 9% from 2014 onwards. There are several macro-economic reasons for the decline and there are enough reasons to believe that it will continue to decline further.

Lower Fiscal Deficit: As per the latest economic estimates, the Government is on track to meet its fiscal deficit target this financial year. Lower the fiscal deficit, lesser is the Government’s need to borrow money and hence, we can see lower yields and higher Gilt prices in the future.

Lower Inflation: Inflation has a direct impact on Gilt yields. Lower inflation will encourage the RBI to further reduce repo rates to stimulate demand in the economy. Falling crude prices have lowered Wholesale Price Inflation considerably this year. The long-term inflation target of 5% is also achievable, albeit there are certain risks of not meeting it.

Accommodative Monetary Policy Stance of RBI: The RBI is committed to reducing interest rates, to spur economic growth, provided inflation remains in check within the policy parameters. This augurs well for Gilt Fund investors in the long term, the short-term volatility not withstanding.

Indian economy is structurally strong: A number of global reports have suggested that the Indian economy is structurally strong, at a time when the global economy is going through a period of tumult. In fact, many reports from leading institutions have predicted that India will be a strong outperformer, in terms of GDP growth over the next few years. This will put lower pressure on fiscal deficit and consequently Gilt yields.

That the macros of the Indian economy are strengthening over the past few years is evidenced by the returns of Gilt Funds over the last 3 to 5 years. Top performing Gilt Funds have given excellent returns over the past three to five years.

In a nutshell

Given that there are widespread expectations for the interest rates to fall in the coming quarters, you could do well by investing in gilt funds.

But remember, you would need to move out before the rate reversal. If you are comfortable tracking and analysing the trajectory of interest rates, you can consider investing in gilt funds opportunistically. For most other retail investors who find it too difficult, other types of debt funds are a better option.

Have Referral Code?