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Gilt Funds: What are Gilt Mutual Funds & How do they work?​​​​​​

Credibility is an important factor in almost all aspects of our lives. For instance, we prefer to take health advice from a trustworthy doctor, buy gold from a reliable jeweller, and try to dine out at restaurants that have a reputation for hygiene and cleanliness.

Shouldn’t we carry the same safety precautions when lending our hard-earned money? Absolutely. Lending money to a non-dependable source can be dangerous and incur losses. Do you know who is considered one of the most credible borrowers? It’s the government, as it is not likely to default.

“Wait, a government borrows money?”

Well, yes. The government requires funds to undertake various development projects and to meet other financial requirements. So, it issues securities by borrowing these funds. A mutual fund scheme that invests in these government-issued securities is known as a Gilt Mutual Fund.

Now that you know gilt funds' meaning, let’s see how they work.

How do Gilt Mutual Funds work?

When the government requires funds, it approaches the Reserve Bank of India (RBI). The RBI then issues bonds with fixed maturity to raise these funds. When the bond matures, the money is returned to the investors. A gilt fund enables retail investors to invest in various government securities in one go.

Benefits of investing in gilt funds

Investing in gilt funds can provide the following benefits.


1. Exposure to government securities
Retail investors may easily invest in such securities by investing in a gilt mutual fund.

2. Minimal Credit Risk
As these securities are issued by the government, which has responsibility for national welfare, the credit risk of gilt funds is minimal.

3. Low liquidity risk
These securities can be traded easily in the secondary market.

4. Tax efficient
As gilt funds are debt mutual fund schemes, the returns generated from gilt funds can avail indexation benefits if the holding period is more than 36 months.

Things to know before investing in Gilt Funds

Gilt mutual funds may carry less risk than the equity market, but they are subject to interest rate risk. For example, let’s assume the current interest rate is 7%. So, the gilt funds may offer a similar rate of interest. Now, if the rates decrease to 5%, the demand for the bond that pays 7% interest will increase. As in, investors will be ready to pay more for a bond that pays a higher rate of interest.

Consequently, if the interest rate increases to 9%, the demand for a bond paying 7% will decrease; here, the investors may also prefer a bond paying a higher interest rate. As a result, the bond that offers 7% interest may be sold at less than its actual price.

Who should invest in gilt funds:

1. Investment Horizon
Gilt funds are suitable for investors with a medium to long-term investment horizon, typically over 3 years.

2. Investment Objective Investors whose main objective is safeguarding their capital while making the most of interest rate changes can consider investing in gilt mutual funds.

To sum up, gilt mutual funds invest in high-quality government securities with minimal credit risk but are subject to interest rate risk.

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Disclaimer:
This is an investor education and awareness initiative by Nippon India Mutual Fund.
Helpful information for investors: All Mutual Fund investors have to go through a one-time KYC (know your Customer) process. Investors should deal only with registered mutual funds, to be verified on SEBI website under 'Intermediaries/ Market Infrastructure Institutions'. For redressal of your complaints, you may please visit www.scores.gov.in . For more info on KYC, change in various details & redressal of complaints, visit mf.nipponindiaim.com/investoreducation/what-to-know-when-investing This is an investor education and awareness initiative by Nippon India Mutual Fund.

The information herein is meant only for general reading purposes and the views being expressed only constitute opinions and therefore cannot be considered as guidelines, recommendations or as a professional guide for the readers. The document has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. The sponsor, the Investment Manager, the Trustee or any of their directors, employees, associates or representatives (“entities & their associates”) do not assume any responsibility for, or warrant the accuracy, completeness, adequacy and reliability of such information. Recipients of this information are advised to rely on their own analysis, interpretations & investigations. Readers are also advised to seek independent professional advice in order to arrive at an informed investment decision. Entities & their associates including persons involved in the preparation or issuance of this material shall not be liable in any way for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including on account of lost profits arising from the information contained in this material. Recipient alone shall be fully responsible for any decision taken on the basis of this document. Language Disclaimer:
While utmost care has been taken in translating the article into respective regional language(s), in case of any confusion or difference of opinion, article available in English language should be deemed as final. The article provided herein is meant only for general reading purposes and the views being expressed only constitute opinions and therefore cannot be considered as guidelines, recommendations or as a professional advice for the readers. The document has been prepared on the basis of publicly available data/ information, internally developed data and other sources believed to be reliable. The sponsor, the Investment Manager, the Trustee or any of their directors, employees, associates or representatives (“entities & their associates”) do not assume any responsibility for, or warrant the accuracy, completeness, adequacy and reliability of such information. Recipients of this information are advised to rely on their own analysis, interpretations & investigations. Readers are also advised to seek independent professional advice in order to arrive at an informed investment decision. Entities & their associates including persons involved in the preparation or issuance of this material shall not be liable in any way for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including on account of loss of profits arising from the information contained in this material. Recipient alone shall be fully responsible for any decision taken on the basis of this article. "ABOVE ILLUSTRATIONS ARE ONLY FOR UNDERSTANDING, IT IS NOT DIRECTLY OR INDIRECTLY RELATED TO THE PERFORMANCE OF ANY SCHEME OF NIMF. THE VIEWS EXPRESSED HEREIN CONSTITUTE ONLY THE OPINIONS AND DO NOT CONSTITUTE ANY GUIDELINES OR RECOMMENDATION ON ANY COURSE OF ACTION TO BE FOLLOWED BY THE READER. THIS INFORMATION IS MEANT FOR GENERAL READING PURPOSES ONLY AND IS NOT MEANT TO SERVE AS A PROFESSIONAL GUIDE FOR THE READERS."

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