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Home / Mutual Funds

Mutual Funds

Gilt Funds

Today after having witnessed the inconsistencies within the stock market, the average investor looks for security more than anything else, also safety and liquidity. Since this mindset has manifested itself in the market, government securities, gilt funds and securities are the the safest option available. So what if they seem boring?

Gilt funds are one of the safest investment options available in today's doubt and debt-ridden market. Yet, there is a price to pay for this safety in the form of low returns. Perhaps, the greatest hindrance is the lack of liquidity. Yet, the maladies of low returns and liquidity are eased by the introduction of Gilt Edged funds.

Gilt-edged funds are mutual funds that will invest solely in government securities. Apart from safety, which is inherent in a government security, investors in gilt-edged mutual funds enjoy liquidity, affordability and a host of other things. 

An investor can withdraw his money anytime either partially or fully (if it is an open ended fund). In fact this attribute of gilt funds combined with an average promised return greater than the local savings bank deposit, is giving most banks a run for their money. 

Since bank deposits score over other instruments in terms of liquidity, most open-ended mutual funds are trying to match this attribute by enabling encashment of units in 24 hours.

More than any, the greatest catch of most gilt funds are the tax benefits which includes more often than not, a tax free dividend in the hands of the investor and no tax deduction at source. 

Yet, the returns from the Gilt Edged instruments are low and the price movements of the underlying security are too small to make any overnight profits. And the one inherent risk of any Gilt Edged fund is that of the market. Since the price of a Gilt Edged fund is inversely related to the market interest rate, any increase in the same will push the market price of the Gilt Edge fund down and along with it the Net Asset Value of the fund. 

Traditionally, such funds have attracted the attention of retired investors particularly because of its safety. Notwithstanding, the magic of gilt funds have also lured investors who have a low risk profile. Today the gilt edged fund have become a popular investment option and many asset management companies like K-Gilt of Kotak, Templeton India Government Securities Fund (TGSF) of Templeton have timed its fund to take advantage of the growing demand for high safety instruments.

However, what has to be kept in mind is that such funds develop interest among lay investors only when the other markets are not doing well. Today, with the Sensex rising from its slumber, it remains to be seen whether the fund generates as much interest as envisaged.

Click here to learn more about Income funds.

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