Invest in Gilt without any guilt
As it is rightly said that there is a certain risk associated with investments in mutual funds, be it market risk or credit risk or interest rate risk or even sovereign risk. However, that doesn’t mean in any way that mutual funds are not for conservative investors. There are various funds in which conservative investors can invest and earn. Gilt is one such category in which conservative investors can have their assets invested in. Not only conservative investors can get benefit from Gilt, but aggressive investors can also invest in them to contain some amount of downside risk.
According to the Securities and Exchange Board of India’s (SEBI) circular on re-categorisation, Gilt funds are those who must have minimum 80 per cent of their total assets invested in government securities and that too across maturity. On average, Gilt fund invests above 90 per cent of their assets in government securities and rest goes into cash or cash equivalents. These funds invest in securities that are backed by the Government of India. This makes them free from any credit risks. However, they would be still prone to interest rate risks.
If we look at the performance of the Gilt funds on a rolling returns basis, the average 1-year rolling returns for the period range from February 13, 2015 to June 14, 2019 is 9.12 per cent. If we assume that the investment was made by buying units in the financial 2015-16 and selling those units in financial year 2018-19 assuming CAGR of 9.12 per cent then the post long-term capital gains tax returns come to 7.89 per cent. Now, if we look at the average trailing 1-year, 3-year and 5-year returns then they stand as 12.66 per cent, 8.25 per cent and 8.97 per cent, respectively.
Now, if we look at the Sensex, Nifty 50 and Gilt funds then for the same period Nifty 50 gave average 1-year rolling return of 9.58 per cent and Sensex gave 9.42 per cent, whereas gilt funds gave 9.12 per cent. Though the returns generated by the Gilt funds seems to be marginally lower than Nifty 50 and Sensex, the returns are generated at low risk, whereas Nifty 50 and Sensex being volatile in nature carry higher risk.
Though this doesn’t make equity bad and Gilt funds good, it is to be understood that you cannot ignore the fact that it is really important to have debt in your portfolio apart from equity. If you are a conservative risk taker then you can consider investing in Gilt funds as a debt allocation with investment tenure anywhere between 7 years to 10 years. Even aggressive investors can take exposure to Gilt funds to further diversify their portfolio.