You will get two types of investors in the capital market - aggressive and conservative. While aggressive investors prefer investing in high-risk equity stocks, conservative investors prefer debt and gilt funds more.
Gilt mutual funds in India invest in government securities with zero credit risks, meaning you will never lose your investment amount. However, they are often subject to interest rates or duration risks. This article elaborates on the top advantages and disadvantages of gilt funds so that you can make an informed choice. What are Gilt Funds? Gilt funds were introduced by the Britishers in India. During the colonial era, gilt funds were considered the safest investment option in the country. Gilt funds invest your money in various high-quality central and state government-issued debt securities. Like a bank deposit account, a gilt fund generates interest income, and investors receive a part of it. The performance of gilt mutual funds is closely linked to the movement of the interest rates in the economy. In fact, gilt fund returns, and interest rates are inversely proportional - when the interest rates rise, gilt fund returns tumble and vice versa. Therefore, investors often prefer investing in gilt funds during a falling rate regime. The Top Three Advantages of Investing in Gilt Mutual Funds in India 1. Security - Since gilt funds invest primarily in government securities, including treasury bills, bonds, and dated securities, they carry no credit risks. The RBI decides the interest rate of these bonds, making them immune from credit risks. Hence, all informed risk-averse investors willing to get higher returns than fixed deposits prefer investing in gilt funds. 2. Open-Ended - If liquidity is any consideration, gilt mutual funds are the best investment instruments. While most other mutual funds come with an exit load for withdrawals made before one year from the investment date, gilt funds have no exit load. Hence, you can withdraw the amount any time you want. 3. Easy to Invest - Earlier, gilt fund investments were restricted to large financial institutions and banks. However, because of the easing of norms by the RBI, retail investors can also invest in gilt funds. Reputed mutual fund houses, such as PGIM Mutual Fund, offer easy access to government securities through gilt funds. You can submit documents like PAN and Aadhaar cards to create a mutual fund account and invest seamlessly. Now that you know the top advantages of gilt mutual funds in India, let's look at its disadvantages. The Top Three Disadvantages of Investing in Gilt Mutual Funds in India 1. Interest Rate Risk - Gilt funds are totally dependent on the RBI-set interest rates. If the RBI decides to increase the REPO (Repurchase Option) rates, the returns from gilt funds may drop sharply. Hence, your returns from a gilt fund scheme might not be as expected if the interest rates are already at their lowest points and RBI plans to increase the rates. However, since these mutual funds invest in only government securities, the credit risk is nil. 2. Expense Ratio - Not only gilt funds but mutual fund houses levy an expense fee, a.k.a. expense ratio, on all mutual funds across categories like equity, debt, commodity, fund of funds, etc. The expense ratio brings down the overall return from a mutual fund scheme. Fortunately, the Securities and Exchange Board of India or SEBI has capped the maximum expense ratio at 2.25% for debt funds, including gilt funds. For instance, the expense ratio of the PGIM India gilt fund is 1.45% (as of 31-Dec-2021). 3. Not Much Power in the Hands of the Fund Manager - Since gilt funds invest primarily in government securities, the fund manager does not have many options to switch. So, even when the manager understands that the fund returns will decrease due to rising REPO rates, they cannot come out of the investment since government securities have fixed maturity dates. PGIM Makes Gilt Fund Investments Easy! While the capital loss risk of gilt fund investments is minimal, PGIM invests in A-III government securities providing maximum returns. Gilt funds are safer than traditional debt funds, and PGIM Mutual Fund makes it safer and more rewarding.
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