When you lend money, the critical thing to check is how credible the borrower is. And in terms of credibility, nothing surpasses the government. When you invest in gilt funds, you're essentially investing in central or state government bonds.
The term "Gilt" refers to government securities. These are sovereign instruments. They invest in securities with medium to long maturities ranging from three years to twenty years. A lock-in period of 10 years is only applicable to Gilt Funds with a constant duration of 10 years.
As per SEBI guidelines, Gilt Funds must invest at least 80% of their money in Government Securities and State Development Loans (SDLs), the balance in cash and cash equivalents.
Working Mechanism of Gilt Funds
When the government needs funds, it borrows money through an issue of sovereign bonds. The Reserve Bank of India (RBI) is a banker to such offerings of government securities. Gilt Funds invest in these securities.
There are many benefits to investing in Gilt Funds. The government bond market is primarily made of institutional players. Retail investors can buy but minimum investment is prohibitive for small investors. Gilt Funds offer you a chance to invest in government securities even with a small amount of money, ensuring easy access to different government securities. Returns depend on Yield to Maturity (YTM) , where higher YTM can mean lower returns and vice versa. If held to maturity, there can be no failure due to sovereign guarantee on bonds.
Fund managers play a key role in grasping the interest rate cycle, which helps in deciding the best times to invest in government securities. This is important because when inflation goes up, interest rates usually follow suit.
Disclaimer
Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.
