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When to invest in a Gilt Fund?

The current COVID-19 pandemic has not just affected the entire world health-wise but also has had an adverse effect on stock markets across countries. As nations try to fight the virus and bring back stability in the lives of citizens, investors too are hoping that the markets recover. The fact remains that no matter where you invest, it is better to have a long term investment horizon so that your investments do not get affected by market vagaries. But everyone does not have the same financial goals, and some might have short term goals to meet. Hence, depending on your financial goal, risk tolerance and investment horizon, you should decide where or how to invest your money.

Mutual funds too, are categorized based on certain unique attributes like risk profile, fund size, asset allocation, etc. For those who do not know, mutual funds are an investment tool for individuals to invest and increase their potential of seeking some capital gains. Mutual fund houses collect money from investors sharing a common investment objective and invest this pool of funds in stocks and other money market instruments like debt, corporate bonds, G-sec, call money, etc. While several individuals prefer investing in equity mutual funds simply because of their high risks rewards ratio, there are other funds like guilt funds which may offer lesser returns but are also less volatile as compared to equity funds.

What are gilt funds?

Gilt funds come under debt mutual funds. While equity mutual funds invest predominantly in equity and equity related instruments, debt funds invest majorly in fixed income securities. Guilt funds are those debt funds that invest in high rated fixed income securities like central and state government bonds.

How do gilt funds work?

When to Government of India is in need of money, they approach the Reserve Bank of India (RBI). The RBI reaches out to insurance companies and banks for seeking the desired sum, loans it from them and then lends it to the Indian government. In exchange for this loan, the government issues certain fixed income securities. A fund manager managing a guilt fund usually invests in such securities.

When is a good time to invest in gilt funds?

When the maturity period is over, the gilt fund returns the securities to the government and receives capital in return. So the performance of a gilt fund is highly dependent on the fluctuation in the interest rate of those securities. Hence, when the interest rates are on the collapse, it is the right time to invest in a gilt fund.

Like we mentioned earlier before you go ahead and make the actual investment, it is better to understand your financial goal and align your investments accordingly. Gilt funds are supposed to carry moderate to low investment risk and hence someone with a moderate to low risk appetite who doesn’t wish to expose their finances to the vagaries of equity markets may consider investing in gilt funds.

If you are someone with an investment horizon of ten years and above, you might want to consider investing in other types of mutual funds. That’s because gilt funds are ideal for someone with an investment horizon of three to five years. Also, the returns provided by gilt funds are relatively lower, and if you are someone with a high risk appetite seeking higher risk rewards ratio, you may opt for equity mutual funds instead.
You can always add mutual funds to your portfolio to give your financial planning some diversification. But if you are entirely new to the world of investing and do not possess much knowledge about mutual funds, you can always seek the help of a mutual fund advisor.

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