Skip to main content

Gilt Funds - When should you invest in them?

Make sense of rising interest rates and falling bond prices to ensure that your gilt bets hit the bull's eye


   HERE'S a tricky question: Do all investors gain from rising interest rates? Well, if you are the kind who invests only in fixed deposits, rising interest rates work well. But that is not the case with some other forms of investments, particularly gilt funds.


   Gilt funds are schemes that invest in government securities, which are also known as gilts. Government securities are financial securities issued by the Reserve Bank of India (RBI) to help the government finance its fiscal deficit.


   Since government securities have a minimum investment limit of 5 crore, most investors cannot invest directly in them. So, gilt funds are more or less the only way through which retail investors can invest in government securities as the minimum investment limit in a gilt fund is 5,000.

How Do Gilt Funds Earn Returns?

Gilt funds invest in government securities which pay interest every six months. Of course, that's one way gilt funds earn a return. The other component is the increase in value of the government securities these funds invest in. The market price of government securities and interest rates move in opposite direct directions. So, when interest rates are on their way down, the price of government securities goes up and vice versa.


   But why does this happen? When interest rates are on their way down, the newer government securities issued by RBI offer a lower interest rate. This pushes up the demand for the government securities already there in the market which offer a higher interest rate. This is what increases the price of these securities, which translates into more returns for the gilt funds which hold these securities.

Why Should You Invest In Gilt Funds?

Inflation has been the big reason behind RBI raising interest rates in the recent past. The central bank has hiked the repo rate (the rate at which banks borrow short-term money from RBI) by 125 basis points (one basis point is one hundredth of a percentage) this financial year (i.e. April 1, 2010). This, in turn, means that gilt funds haven't been doing well lately, because higher interest rates push down the price of government securities and that, in turn, means lower or negative returns for gilt funds.


   But the good thing is that inflation is clearly on its way down. This, experts feel, may prompt RBI to halt rate hikes. The country has had a good monsoon and bumper crops will ensure that food inflation will gradually come down. Further, most of the government borrowing programme will be over by December 2010, which will mean that there would be greater money available in the market, leading to lower interest rates.


   Inflation coming down and most of the borrowing programme getting over by December 2010 along with RBI is nearing the end of rate hike spree.


   In the recent past, several government-owned companies have sold new shares to the public. This has helped the government improve its fiscal deficit, which is essentially the difference between what the government earns and what it spends. It borrows to fill in the gap. The government was also helped by the sale of 3G spectrum to telecom companies and sale of broadband wireless access (BWA) services which together helped it raise 1.06 lakh crore.

   With these proceeds firmly in its kitty, the Government of India, the biggest borrower, is expected to borrow less. When the demand for money goes down and so does the price of money or what is commonly understood as interest rates.


   As explained earlier, the prospect of lower interest rates would mean higher prices for government securities and, thus, greater returns on gilt funds. It makes sense to invest in gilt funds now with a horizon of at least 6 months to 12 months, as we can see food inflation coming off the high levels with good monsoon and a good rabi output. This should push inflation to 6% by March 11 and will help gilt funds.

Which Funds Should You Go For?

Investors should look at funds with a track record of more than five years (see table). This will ensure that you will hand over your money to a fund which has seen the market cycle well. Also, since the minimum investment in government securities is 5 crore, it makes sense to go with a fund with assets in excess of 50 crore. It is better to avoid small funds as the fund manager will find it difficult to manoeuver his investments. You can get this information from the fund fact sheet that is readily available on the website of the mutual fund.

What Are The Risks?

The biggest risk is of a sudden upswing in interest rates. Quantitative easing (printing of dollars) in the US can push up the prices of commodities and further fuel inflation. Of course, not all are bullish on gilt funds. The government is not able to control expenditure which is inflationary in nature. And that may mean further interest rate hikes from the RBI and a tough time for gilt funds.

 

Popular posts from this blog

ICICI Pru Mutual Fund Dividend

ICICI Prudential Mutual Fund has announced dividend under the following schemes: Scheme Dividend ( Rs /unit) ICICI Pru Capital Protection Oriented Ser V Plan B-D 0.03611325 ICICI Pru Capital Protection Oriented Ser V Plan B Direct-D 0.03611325 ICICI Pru Balanced Advantage Direct-DM 0.06 The record date has been fixed as February 08, 2017. ------------------------------ ------ Invest Rs 1,50,000 and Save Tax upto Rs 46,350 under Section 80C. Get Great Returns by Investing in Best Performing ELSS Funds Top 4 Tax Saver Mutual Funds for 2017 - 2018 Best 4 ELSS Mutual Funds to invest in India for 2017 1. DSP BlackRock Tax Saver Fund 2. Invesco India Tax Plan 3. Tata India Tax Savings Fund 4. BNP Paribas Long Term Equity Fund Invest in Best Performing 2017 Tax Saver Mutual Funds Online Invest Best Tax Saver Mutual Funds Online Download Top Tax Saver Mutual Funds  Application Forms For further information contact  SaveTaxGetRich on 94 8300 8300 ------------------------------ ------ Leave y...

Hidden Bank Fees

  What Banks Hide From Customers Imagine after a peaceful and exciting holiday you receive your bank statement with steep charges. You then rush to your bank and start confronting staff members and to your dismay, you come to know that the high end debit card was charged very heavily. Wouldn't this cause damage to your finances? So remember, the world outside is full of deceptive and double cheating people. Unethical practices are always used by company sales person in order to meet the target. Credit card companies, mutual funds and bank institutions always play dirty tricks to lure customers and the practices are rampant. So here's how you should be careful while dealing with your banks: High End Debit Card Charges While opening an account with a bank you opt for a debit card with minimal charges. But later on when you upgrade your card and opt for high end debit card the annual charge rise by a good amount. Though such a card has slew of features but it all comes at a high ...

Partial withdrawal from PPF

  Public Provident Fund (PPF) account has a lock in period   If you opened a PPF account to meet your retirement needs,, think twice about withdrawing from this fund before retirement. But provided it's an emergency here are the rules. Public Provident Fund (PPF) account has a lock in period before which you cannot withdraw your money.   The partial withdrawal is allowed after the completion of 6 financial years . This means that you will be allowed a partial withdrawal from 1 April 2017. The maximum partial withdrawal allowed is the least of the following: 50 percent of the account balance at the end of fourth financial year, 31 March 15 50 percent of the account balance of the end of previous financial year, 31 March 17.   There's a loan option available on your PPF account between the fourth and the sixth financial year. You can obtain a loan of up to 25 per cent of the balance in your account. However, this will attract interest of 2 percent more than the prevailing ...

Updating a minor PAN card upon becoming adults

  Updating a minor's PAN card once they become adults A PAN card issued in the name of a minor does not contain the minor's photograph or signature, and therefore, cannot be used as a valid proof of identity. Once a minor PAN card holder turns 18, the relevant changes must be made in the PAN records. A new card is then issued bearing a photograph and signature. Application The applicant is required to fill up the "Request for new PAN card andor changes or correction in PAN data" form. The form can be filled up online by accessing NSDL's Tax Information Network website and clicking on the online PAN application tab. Information The applicant must mention the existing PAN number in the application and check the `photo mismatch' and `signature mismatch' boxes, and submit the online form. The form must also be printed out, signed by the applicant, and submitted along with two photographs. Documents Identity and address proof in the form of a copy of the app...

ICICI Prudential Value Fund Series I

Invest In Tax Saving Mutual Funds Online Download Tax Saving Mutual Fund Application Forms Buy Gold Mutual Funds Call 0 94 8300 8300 (India)   Performance of the scheme will be benchmarked to the S&P BSE 500 index ICICI Prudential Value Fund is a closeended equity scheme. The scheme will have tenure of three years (1095 days) from the date of allotment of units. Units of the scheme will be fully redeemed at the end of the maturity period, unless rolled over. NFO PERIOD:   The NFO is open from October 18 to 28. The minimum subscription during the NFO period is Rs 5,000. SCHEME OBJECTIVE:   The scheme aims to provide long-term capital growth by investing in a well-diversified portfolio of equity and equity-related securities. INVESTMENT STRATEGY:     The fund proposes to invest in stocks that are trading at a huge discount in the BSE 500 index and plans to book profit and distribute dividen...
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now