Gilt funds, a unique category of investment fund, primarily invest in gilt securities. These fixed-interest generating stocks are issued by the central and state governments. The concept of gilts originated from Britain but has since been adopted by several Commonwealth nations, including South Africa and India.
The process begins when the government requires funds or loans. In India, the Government approaches the Reserve Bank of India (RBI) for these needs. To accommodate this request, the RBI borrows money from other entities like insurance companies and banks. They then lend this money to the government and issue government securities having a specific tenure. These securities are subscribed by the fund manager of gilt funds.
At maturity, the gilt fund returns the government securities to RBI and receives their money back. Because these securities are government-issued, they are known as high-grade securities and rarely fail financially. However, the yields they carry are relatively low due to the higher credit ratings. For instance, these may offer a rate of 4%, similar to well-known companies with an AA rating.
Risk Factors Associated with Gilt Funds
Despite being high-grade securities, gilt funds are not entirely risk-free. The most significant risk they carry is related to changes in interest rates. They are particularly vulnerable in this aspect, making them potentially the most risky debt funds available in the market for long-term investments. This risk factor primarily stems from their sensitivity to changes in interest rates.
Key Facts about Gilt Funds
| Fact | Description |
|---|---|
| Type of Investment Fund | Gilt Funds |
| Primary Investment | Gilt Securities (fixed-interest generating) |
| Risk Level | High due to interest rate sensitivity |
| Typical Return Rate | Around 4% |
