SIP on gilt funds can be a wonderful idea

It is no secret that SIP (systematic investment plans) have been popular for quite some time now. In fact, it is a great way to start investing in mutual funds in a regular manner, especially for young investors. People who choose to invest in mutual funds through SIPs are aware of the basic functioning. However, many fund houses in India have introduced several SIP variations that may come in handy. 

Normally, you (the investor) might choose SIPs on equity funds just like most other investors. But, the recent turmoil in debt funds and the returns it gained, has diverted the attention of many towards gilt funds. Gilt funds are nothing but investments made in government securities that range from high to low horizons. To simplify the meaning of gilt funds for you, let’s get into its basics: 

What are Gilt Funds?

First things first – the word gilt is taken from ‘Gilded Edge Certificate.’ These certificates happen to be printed on gilt or gilded edges. Typically, it refers to high-grade bonds that are used by the government or private organisations to generate revenue. 

As the name suggests, gilt funds invest in low-risk debt instruments, such as government securities or BNHLF stock. So, it allows capital preservations while delivering moderate returns at the same time. Despite the low returns, gilt funds promise a better asset quality as compared to equity funds. Therefore, it is a safe investment option for all risk-averse investors. 

Now that we’ve painted a basic picture of what gilt funds are, let’s dive deep into SIPs on gilt funds: 

SIPs for gilt funds is a decent option for long-term investors. However, SIP for equity funds is ideally preferred by investors since it works on the principle of rupee cost averaging and manages the volatile risks of the market. But don’t fret! Investing in SIPs for gilt funds is still a favourable option. The concept of rupee cost averaging works under gilt funds as well. 

Another advantage of SIPs on gilt funds is receiving substantial returns. The investment delivers reasonable returns, even when there is a dip in the market condition. Under gilt funds, you will find two components of returns:

  1. Interest/ coupon of underlying instruments 
  2. Price gains due to market-to-market adjustments based on the changing interest 

Having SIPs in gilt funds is perfectly normal for many reasons. Let’s look at these reasons for your better understanding:

  • The volatile interest rate
  • Fall in prices in case there is a rise in interest rate
  • Longer duration based funds
  • Stability to the portfolio 

Before investing in SIPs for guilt funds for all the above reasons, it is crucial to consider the following things given below. Let’s take a look:

  1. Consider the market volatility without fail
  2. Do not get carried away with the fluctuations in the net asset value 
  3. Consider the tax implications when withdrawing it. Ideally, debt funds are tax-efficient only after the completion of three years. Therefore, there will be a difference for the three-year cut for each instalment 
  4. Evaluate the risk factor of a gilt fund investment. 

In a nutshell, many investors call gilt funds their safe haven due to the minimal risks associated with it. However, it is essential to keep a track on the market updates. Analysing the market is beneficial for making the most of the gilt funds. Happy investing!