Bonding with govt
Gilt funds of asset management companies invest in government bonds (G-Secs), which tend to rise when interest rates fall and vice versa. The maturity of G-Secs varies as the government issues paper of various tenure, which could be short, medium and long term. The credit risk in government securities is almost nil as the government has zero risk of default. But the interest rate risk rises as the market price of debt security varies with fluctuating interest rates.
Analysts say gilt funds are a very important part of asset allocation with their inverse correlation to stocks and they could contribute significantly to the yield enhancement of a portfolio. Analysts say G-Secs with higher maturity are more sensitive to interest rates and investors have to look for the tenure in which the fund house is investing their money. Gilt funds are not as liquid as other funds as G-Secs are not actively traded, and if there is a sudden redemption pressure, fund houses will have no other means but resort to distress sale.
Analysts also say that investors must avoid those gilt funds that have a small corpus, as they will not be able
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