Debt funds arefunds that invest in long, medium or short-term income bearing instruments like corporate bonds, debentures, fixed deposits, treasury bills, commercial papers, etc. These arethe in fixed income instruments preferred by investors who want steady income and not willing to take much of risk.
Debt funds guarantee a constant flow of returns and are less volatile than other equity funds that also form part of mutual funds investment. Debt securities are generally less risky than equities, they are subject to credit risk (risk of default) by the issuer at the time of interest or principal payment. Debt funds are also highly liquid as they can be converted to cash easily and are useful in creating a well balanced portfolio.
These are mutual fund schemes. Invest in medium and long term government securities and money market instrument. Originated in Britain Stick to high quality low risk debt. First Gilt fund – December 1998 Issued by RBI on behalf of Government.
Gilt funds originate from the requirement of investors to ensure higher safety levels for their invested money. Giltfunds generally provides marginally high returns than a money market fund , and are the good options to the investors who seek protection of principal. Giltfunds can be volatile due to increase or decrease in interest rates. There could be a possibility that the debt funds lose some part of their net asset value (NAV) also with high interest risk . But these schemes are safer as they invest in papers backed by government.
These areideal for those who want more safety for their investments or are risk-averse and, at the same time, are looking for reasonable returns on their money. According to mutual fund rating agency, Value Research, medium and long-term gilt funds gave returns of 3.84 per cent for the year . In the short-term (less than a year), they have returned 4.18 per cent.
These area good option when inflation is near its peak and the RBI is not likely to raise interest rates immediately. A slowdown in GDP growth, rising inflation, a decline in IIP (Index of Industrial Production) and expectations of a fall in corporate earnings. Broadly speaking,a situation when interest rates have peaked and a downturn seems imminent, would be an opportunity time to invest in gilt funds.
There are three types of risks involved in any debt instrument:-1)Credit Risk2)Liquidity Risk3)Interest Rate Risk As gilt funds invest only in government bonds Credit Risk in a government security is near to zero, but not zero. G sec are considered to be the safest in the debt markets.
Gilts are highly liquid in nature and Gilt funds, being the mutual fund are liquid. The biggest risk involved in Gilt funds is Interest Rate Risk . Here “Price of the bond and interest rates are inversely related’. When interest rate rises, bond prices fall or vica versa. Bonds prices and gilt prices tend to fall in rising interest rate scenario.
1. Less credit risk: As they are backed by government there is almost no credit risk. 2. Open to retail investors: Only institutional investors can invest in G- sec market but Gilt funds provide retail investors a low-cost way to invest in G-sec, which otherwise was open only to large players. 3. Diversification: Investment in Gilt funds provides for effective diversification.
1.Interest rate risk: If the interest rate increases the price of G-sec fall which is a big risk to the investor.2.Not Liquid: Underlying securities are illiquid as they are not frequently traded. So if the fund manager opts for distress sell, to relieve redemption pressure, the fund may suffer loss.3. Mostly ideal for short term investment: Makes ideal short-term investment as most of the funds tend to be volatile over longer investment time frame and equity scores over gilt in the long term.
BEST GILT FUNDS IN INDIAScheme Name Last 1 Year Return Last 3 Years ReturnBaroda Pioneer Gilt Fund (Growth) 7.83% 7.75%HSBC Gilt Fund (Growth) 7.58% 2.38%L&T Gilt Investment (Growth) 7.04% 3.04%UTI Gilt Advantage Fund-LT (Growth) 6.84% 9.17%Birla Sunlife GPLP (Growth) 6.20% 5.01%Sahara Gilt Fund (Growth) 5.93% 8.77%DSP BlackRock Treasury Bill Fund 5.84% 4.46%(Growth)SBI Magnum Gilt STP (Growth) 5.62% 6.42%LIC Nomura G Sec Fund (Growth) 5.42% 5.07%ICICI Prudential GFIP (Growth) 5.40% 11.83%IDFC G sec Fund Plan A (Growth) 5.37% 7.81%
Investing in gilt funds though offer safe investment option but timing to buy any debt fund is equally important. Make sure that don’t get into any debt instrument like gilt funds when are the interest rates have formed a base. It is better to have only a small portion of your portfolio in gilt funds. At the same time you must also consider your capacity to take risk, goals and funds track record you are investing in.