Gilt funds: What they are actually
What's the story
Gilt funds are a popular investment option for those looking to invest in government securities. These funds invest in bonds issued by the government, which are considered safe and stable. For beginners, understanding how to invest in gilt funds can be a great way to diversify their portfolio and get fixed returns. Here's a guide on how to get started with gilt fund investments.
#1
Understanding gilt funds
Gilt funds are mutual funds that invest primarily in government securities with varying maturities. The main attraction of these funds is the safety they provide, as they are backed by the government. Since the risk of default is extremely low, gilt funds are ideal for risk-averse investors looking for steady returns over a longer period.
#2
Choosing the right fund
Selecting the right gilt fund is critical for achieving your investment goals. Look at factors such as the fund's past performance, expense ratio, and the experience of the fund manager. You should also consider the duration of the bonds in the portfolio, as bonds with longer durations are more sensitive to interest rate changes but may offer higher returns.
#3
Monitoring interest rates
Interest rates have a direct impact on gilt fund performance. When interest rates go up, bond prices fall, and vice versa. As an investor, you should keep an eye on economic indicators that affect interest rate movements. This will help you make informed decisions about when to enter or exit a particular gilt fund.
#4
Understanding tax implications
Gilt funds also come with tax benefits, given that they are classified as equity if held for more than three years. This means long-term capital gains tax applies at 20% with indexation benefits. Knowing these tax implications can help you plan better and maximize post-tax returns from your investments in gilt funds.
Tip 1
Starting small and diversifying
For beginners, it is advisable to start small by investing through systematic investment plans (SIPs) in gilt funds. SIPs allow you to invest a fixed amount regularly, which helps in averaging out costs over time. As you gain more confidence and understanding of the market dynamics, you can gradually increase your investments. Also, consider diversifying across other asset classes for balanced portfolio growth.