Gilt Funds
What are Gilt Funds
Gilt Funds are also known as G-sec funds or Government securities, These are debt funds which invest basically in government securities and fixed interest bearing securities backed by state & central govt, There is no allocation of any equity component, This was the only category which delivered double digit return in last 1 year
Risk analysis
Credit Risk: Sovereign guarantee as they primarily invest in government securities so technically zero credit risk almost
Liquidity Risk: Unlike corporate bond funds Gilt funds are most liquid instruments as they don’t carry credit risk, since money is invested with government understandably these funds carry minimal risk
Interest rate risk: They primarily suffer from an interest rate risk, Interest rate also is an highest risk associated with a fund, Gilts return are volatile as they are sensitive to interest rate movements as government borrowings usually happen for a longer duration
Now What do we mean by Government Securities: These basically are bonds or debt papers issued by RBI on behalf of government, they have a maturity of more than one year, They do have a good secondary markets
An example: Coupon 7.17% on face value
Name of issuer: Government of India
Date of Issue: Jan-2018
Maturity: Jan 8 2028
Coupon payment dates: Half yearly (July & Jan 8 every year)
Gilt fund trailing returns
1 Year: 12.8%
2 years: 7.9%
5 years: 8.7%
How come G-Sec interest rates fell in 2020 Issue??
Its because of falling interest rate cycles, a series of policy repo rate cut by RBI in last 1 year, RBI is cutting both rep & reverse repo to push the economy, Trying to push credit growth for economic development, In case new govt bonds and securities are issued at lower interest rates, prices of old papers with higher interest rate are traded at a higher price raising NAV’s of existing gilt funds, Also G-sec rate for longer maturity is higher, it is because higher the maturity of bond higher will be the interest rate risk, so in order to compensate the added interest rate risk, G-sec rate of longer maturity papers are kept higher
