Investing in Gilt Funds

With more CRR & Repo cuts expected in the coming months, what do you feel are the prospects for gilt funds? Is it the right time to invest in gilt funds?
Sumeet Dalmia

On any fixed income investment, whether it’s a gilt or a corporate bond or even a fixed deposit in a bank, there are three types of risk. These are credit risk, liquidity risk and interest rate risk. A high credit risk means that a borrower wouldn’t be able to pay back an investment at all. In government securities, this risk is generally considered to be zero. In other types of fixed income investments, this risk is higher. In any economy, government securities are considered to be of the lowest risk. Therefore Gilt fund has stood as a far safer investment avenue than others.

There is an inverse relationship between interest rate and prices of securities. And this gets reflected in government bonds first, so if the interest rate goes down, the prices of bonds rises and vice-versa.

Gilt funds could be opportune investment for risk adverse investors particularly when interest rates are likely to go down. Over the past one year till October 24, 2008 Medium & Long–term gilt funds have been the best performing debt fund segment with some top rated Gilt funds giving a return of over 20%.

This article was originally published on December 03, 2008.