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Gilt Vs Gilt Funds

Buying gilt has been made easier for individual investors now with 5 percent of government securities auction reserved for them. But for now you may be better off with gilt funds.

Buying gilt has been made easier for individual investors now. To attract individual investors the Reserve Bank has notified that it will reserve 5 per cent of the total government securities auction for the individual investors. Retail investors can now place non-competitive bids through banks and primary dealers in the auction of dated government papers. And the price of the bonds will be the weighted-average rate that will emerge in the auction on the basis of the competitive bidding for the 95 percent per cent.

Now individual investors have been allowed to bid for the least risky debt instrument in India – the government securities. Gilts are also the safest debt one can invest, as Government of India being is the borrower it guarantees the repayment of your principal and interest. Every year, the government borrows many thousand crore by issuing bonds of varying maturity, which ranges between two to twenty years. Mainly banks and financial institutions buy these bonds.

Gilts could be especially suited for retirees, orphan and widows seeking stable guaranteed income. It benefits the government as retail participation is far more stable borrowing for the government against institutional ownership of government bonds. Pre independence, individual investors directly owned government securities to an extent of 50 per cent.

And there may be a strong latent demand now, as there are very few long-term fixed income alternatives. Or the ones we have like the deposit of IDBI and IFCI is perceived to be very risky today. Gilt with a zero credit-risk, guaranteed return and long tenure could be especially useful to many investors. But mere reduction in minimum investment is unlikely to make these bonds very useful and friendly. The lack of liquidity, tax inefficiency and interest rate risk associated with gilt investments is a dampener. It is not easy to buy or sell these bonds, as today only PNB Gilts is the sole largest primary dealer, given the constraints in terms of developing widespread availability of these bonds, it will remain beyond reach.

But for now gilt funds still have an edge over buying gilts directly for the convenience, diversification, high-liquidity and to an extent professional management. But good things come with a price tag. Hence, the only minus with a gilt fund is that the returns you get from are expense adjusted and little volatile.