Know how Even gilt funds can be risky

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THE term gilt funds often evokes memories of safety and security of investments. This is only partially true and the investor has to ensure that they understand the complete details related to the investment before committing money to this area. This can also avoid a situation where the investor is left searching for answers after witnessing an unexpected position. Here are some angles related to gilt mutual fund investment that every investor should know. Higher interest rate risk The gilt funds invest in government securities and are then traded by the fund manager in the debt market.

Surprising, as this may seem, it actually results in a situation where there could be higher risk for the investor on account of interest rate risk, which is not present in some other instruments like fixed deposit.

Since, there is a lot of trading in the government securities, the investor will find that the securities are extremely sensitive to the various changes that are being witnessed on the interest rate front. For longer dated securities the changes are quite sharp. If the fund manager may have built a position; whereby expecting the interest rates and yields to behave in a certain manner, but if the opposite turns out to be true then there could be a reduction in the value of the securities. This will result in a lower net asset value and the investor will suffer in terms of either a lower return or in some cases even a negative return. Position in portfolio The gilt funds should be considered, as an investment option only when the investor knows about the working of the debt markets and the manner in which the prices of such instruments will react to different changes.

The other point is about the position that the fund will occupy in the portfolio. It should not be given a role, whereby it is supposed to meet the regular income needs of the individual because this might be possible when the times are good, but the going will be tough if the debt market conditions are not conducive. The position should be such that it is able to make use of the opportunities and deliver the required gains when the situation moves in favour of the individual. This is something that needs primary attention so that the risk of the investor is also limited. The other way in which gilt funds can be seen is using them as a route for investing only during those periods when the interest rates in the economy are expected to fall. If the rates actually fall and there are investments into long term gilt funds then the returns earned can also be above average.

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