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What are gilt mutual funds and how to invest in them?

A gilt fund is a type of debt fund that invests in fixed-income securities offered by the state and central governments. Your capital is invested in government-funded infrastructure projects and other expenditures with a guaranteed return.

When the government needs funds, it approaches the Reserve Bank of India (RBI) to get debt capital. The RBI borrows funds from consumer-facing entities like insurance companies and banks and provides capital to the government. The RBI issues treasury securities with fixed tenures as part of a trade, to which these fund providers subscribe.

Benefits of investing in gilt funds

●      Experience investing in government securities

It is common for retail investors not to have direct exposure to some government securities. Individuals can, however, get exposure to such government securities by investing in gilt funds.

●      Minimise credit risk

If you want to minimise investment risks, gilt funds could be a safe option for you. These have minimum to negligible credit risk as the government backs the underlying securities. The government doesn’t tend to default on its debts, making gilt funds suited for risk-averse investors.

●      Reasonable returns

Gilt funds provide adequate returns, when compared to a few other forms of investment avenues like bank deposits.

Who should invest in gilt funds?

Since gilt funds invest in government securities, they match investors’ security requirements. Gilt funds differ from bonds in this way. Bond funds may allocate a part of their portfolio to corporate bonds, which might be riskier than gilt funds. Therefore, if you are a risk-averse investor and prefer investing in government securities, invest in gilt funds.

Top five gilt funds in India

To make your investment decisions simpler, these are a few of the best gilt funds to invest in 2021 based on CRISIL rankings:

  1. SBI Magnum Gilt Fund
  2. LIC MF Government Securities Fund
  3. Edelweiss Government Securities Fund
  4. IDFC Government Securities Fund
  5. Axis Gilt Fund

Should you invest in gilt mutual funds?

If you are new to investing and want to grow your wealth at a decent pace when equity funds are in a downtrend, gilt funds could be an option. These funds could also be ideal for you if you have minimum risk appetite and are seeking additional income with low risk.

However, it is important to note that the performance of a gilt fund greatly depends on the change of interest rates. The best time to invest in gilt funds would be in a period of falling interest rates.

If you are looking to begin your investment journey by opting for mutual funds, it is prudent to reach out to an expert to steer your investments in the right direction.