Market-linked instruments and investments are generally regarded by many to be risky. However, not all of them are. There are a few types of mutual funds that are not quite risky and offer plenty of protection from downsides and volatility. Gilt mutual funds are a very good example of this. Wondering what gilt funds are and why they’re generally regarded by many to be a safer investment option? Continue reading to find out.
A gilt fund is essentially a mutual fund that invests the money pooled from different investors into fixed income government securities. These funds invest in both central and state government issued securities. One of the advantages of gilt funds is that they carry zero default risk since the securities that the fund purchases are issued by governments who don’t default on payments.
Now that we’ve answered the question ‘what is a gilt mutual fund?’, let’s move onto the next part of the article. Did you know that gilt mutual funds offer plenty of advantages to an investor. Here’s a quick look at some of the most important ones.
1. Easy access to government securities
Governments, both central and state, offer fixed income securities regularly. However, most of them are restricted to banks and other institutional investors. By investing in gilt funds, you can essentially gain access and exposure to government securities, which you would not have had otherwise.
2. Zero default risk
As you’ve already seen above, the government securities that the gilt funds invest in are virtually free from default risk. Repayment is guaranteed by the sovereign, which makes these funds one of the best options for individuals averse to risk.
3. Ability to generate good returns
Gilt funds offer quite a good return on your investment. This is especially true in the case of an economy with falling interest rates since the funds generally tend to offer better interest rates than bank deposits.
Before you go ahead and consider investing in a gilt fund, there are a few things that you should take into account. Here’s a brief overview of the same.
1. They are long-term investments
Since gilt mutual funds invest in government securities, which generally have long maturity periods of 3 to 10 years, they’re best suited for individuals with long-term outlook.
2. They’re dependent on interest rates
The NAV of the gilt funds is dependent on the existing interest rates. For instance, the NAV goes up when there’s a reduction in the interest rates, whereas the NAV tends to go down when the interest rates are raised.
3. The capital gains from the funds are taxable
Any capital gains that you get from gilt funds are completely taxable depending on how long you held the investment for.
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