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

Surrender ULPPs

  ICICI Pru LifeTime and ICICI Pru Lifestage are Unit Linked Pension Plans. Such insurance linked retirement plans are neither good investments nor do they offer sufficient insurance cover. As you can see, these have turned out to be bad deals. In the Lifetime plan, the fund value is not even equal to the total premiums that you have paid and in the Lifestage plan your return is just about 6% which is quite low. The mortality charges are as per your age which is why they have increased. Moreover, once these plans matures, you will have to compulsorily opt for annuity (regular income) and the annuity rates are generally modest. Assuming these plans mature in the next one year, it will be wise to surrender the plan now and curb your future commitments.   Before you choose to buy a term plan, you have to consider a few points. You need to insure yourself, only during the time you are working and your family is financially dependent on you. At the age of 59, not all insurance companies w...

ICICI Pru Constant Maturity Gilt dividend

Invest ICICI Prudential Constant Maturity Gilt Fund Online ICICI Prudential Mutual Fund   has announced dividend under the following schemes: Scheme Dividend ( R /unit) ICICI Pru Constant Maturity Gilt-DQ 0.26543239 ICICI Pru Constant Maturity Gilt Direct-DQ 0.27171609 ICICI Pru Q Interval Plan I-D 0.10617296 ICICI Pru Q Interval Plan I Direct-D 0.10703967 ICICI Pru Q Interval Plan I Ret-D 0.10617296             The record date has been fixed as June 13, 2016.   ----------------------------------------------- Invest Rs 1,50,000 and Save Tax under Section 80C. Get Great Returns by Investing in Best Performing ELSS Mutual Funds Top 10 Tax Saver Mutual Funds to invest in India for 2016 Best 10 ELSS Mutual Funds in india for 2016 1. BNP Paribas Long Term Equity Fund 2. Axis Tax Saver Fund 3. Franklin India TaxShield 4. ICICI Prudential Long Term Equity Fund 5. IDFC Tax Advantage (ELSS) Fund 6. Birla Sun Life Tax Relief 96 7. DSP BlackRock Tax Saver Fund 8. Reliance Tax Saver (ELSS) ...

SBI MAGNUM MIDCAP ONLINE

Invest SBI MAGNUM MIDCAP ONLINE   SBI MAGNUM MIDCAP fund didn't fare well in its initial years but, in recent years, has steadily improved its performance under the capable hands of its current fund manager. Although investing predominantly in mid-cap stocks, the average market capitalisation of its portfolio is lower than other category peers.   Although the stock selection approach is mostly bottom-up , the fund manager doesn't shy away from taking bold sector bets , as is reflected in its large exposure to the healthcare sector. She is equally adept at handling performance across market cycles--the fund has captured more of the upside during market upticks and contained the downside during downturns in a better manner than its peers.   Given its superior risk-reward equation, the fund is a worthy pick in its category.     ----------------------------------------------- Invest Rs 1,50,000 and Save Tax under Section 80C. Get Great Returns by Investing in Best Performing EL...

Sundaram Mutual Fund new plan Sundaram Fixed Term Plan CJ

Sundaram Mutual Fund has announced the launch of a new fund named as Sundaram Fixed Term Plan CJ. The new issue will be closed for subscription on January 30. --------------------------------------------- Invest in Tax Saving Mutual Funds ( ELSS Mutual Funds ) to upto Rs 1 lakh and Save tax under Section 80C.   Invest Tax Saving Mutual Funds Online Tax Saving Mutual Funds Online These links can be used to Purchase Mutual Funds Online that are regular also (Investment, non-tax saving)   Download Tax Saving Mutual Fund Application Forms from all AMCs Download Tax Saving Mutual Fund Applications   These Application Forms can be used for buying regular mutual funds also   Some of the best Tax Saving Mutual Funds available are: 1. HDFC TaxSaver 2. ICICI Prudential Tax Plan 3. DSP BlackRock Tax Saver Fund 4. Birla Sun Life Tax Relief '96 5. Reliance Tax Saver (ELSS) Fund 6. IDFC Tax Advantage (ELSS) Fund 7. SBI Magnum Tax Gain Scheme 1993 8. Sundaram Tax Saver   -...

Group Health Insurance

Buy Group Health Insurance Online   For Human Resources, the biggest challenge today is to decide whether medical benefits should be offered to employees or not, what type of plans should be offered, what will be the cost and how will the cost be split between employees and employer. Well, most of these are subjective and would depend on a lot of factors including company size, average employee salary, etc. However, this article will give you a fair idea on how you should go about deciding these factors: 1. Why offer group health insurance benefit to employees : Studies have proved that retention rates among employers offering GHI are much higher than the ones who are not offering. Moreover, the cost of providing this benefit as a percentage of salary is very low as compared to the perceived value. As an example, say if average salary of an employee in your organization is 4 LPA. If you decide to offer a health insurance benefit to him for a Sum insured of ...
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