Glit fund is safe like buying GSEC bonds directly

General
21

Not as safe as directly investing in G-secs

Depends

The underlying security is the same, be it G-sec or Gilt, i.e., both are govt bonds with a sovereign guarantee.

The problem arises primarily because of the different maturity periods.

When you invest in a G-sec, and hold it till maturity, you capital is safe, as you will get back the face value (i.e., not selling when the interest rates rise/bond price falls)

When you invest in a Gilt fund, you are not investing in a single G-sec with fixed maturity, you are investing in multiple G-secs with varying maturity and coupon rates.

So, there is no concept of holding till maturity here, and it all depends on the timing of your redemption of such Gilt fund units.

If you redeem when the interest rates are falling, you will get back your Capital+ some gains due to the premium, but, if you redeem at the time when the interest rates are rising, you might not get back the same capital, as the fund might sell at a discount.

As pointed out by _VishalJain, the ā€œprice risk is there depends on the underlying duration the portfolioā€

Capital safety, appreciation or depreciation, is purely based on the timing of redemption, if the redemption is made during a less volatile period, the capital is safe, in other cases, there could be capital gains/loss based on the repo rates set by the RBI at that time.

This is how understand it.

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22

Hi,

Is there any Fixed maturity Glit fund? Like Glit funds holding GSEC with a particular year of maturity.

23

I mean, gilt funds are for govt bonds, same as how index funds are for equity, so they will always keep holding bonds/G-secs of varying maturity and coupon rates.

These funds keep churning their portfolio, and invest in new Gsecs as and when they are issued.

Just focus on the avg duration of the fund, i assume the scheme document mentions that.

Holding till duration (in theory), preserves the capital

@cvs, didnā€™t know that they expanded the emojis with :heavy_plus_sign: and :heavy_minus_sign:symbols.

So, :heavy_plus_sign: is for agree and :heavy_minus_sign: for disagree, is it? @nithin_kumrr

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24

Thank you , now a newbie to Bond club :slightly_smiling_face: i purchased it based on interest rate and short duration , i want to get returns on my investment regularly , i want to get back my capital at least for me, not at the time of my Grand childrenā€™s :slightly_smiling_face: , next time on wards i will try to apply for the new Gsec by theRBI

25

Yep. :slight_smile:

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26

There is also average risk or whatever it is called. When interest rate was 8% and Iā€™d invested in bonds directly, my 8% is guaranteed. But if I had put the same in Gilt funds, it is not.

When interest rate is falling

  • Direct bonds gain in value
  • Gilt funds also gain in value, but as investments keep coming, they have to invest it at lower interest rates - effectively reducing my returns(as the rates fall further) as the NAV is averaged across all investors across time.

So, the gain would relatively be less in a falling interest rate cycle scenario. The inverse would be true in a rising interest rate cycle. So, a fund invested in high interest rate bonds is valuable, but they lose their value over time, and they also have high expense ratios. The rates also seem to follow a strict trendline and a cycle - so it is possible to vaguely time the rates, even if it is not exact. From a pure gross profit perspective, direct bonds are better. From a profit after tax perspective, Gilt do offer the chance to time in the profit thereby giving better control over tax.

Disclaimer: I maybe completely wrong. But this is my current understanding.

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27

What is this uncertainty? As far as I know, All GSECs are always available as cash collateral un Zerodha.

28

I have seen a few threads complaining about this here.
Because not all of them are liquid, its possible that clearing does not approve all of them.

I have seen this a few times, below links i got from forum search but there will be more

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29

My answer may be wrong but my simple answer is that Nothing is safe on this earth , be it Bank FD , Gsec , Gilt Funds every thing is supported by Directly or Indirectly by the Central Government till the Government is not Bankrupt , unlike the Government of Pakistan , Bangladesh & Sri Lanka :slightly_smiling_face:

30

yes, its safe. Check Risk-o-meter and ideal investment horizon mentioned in fund page. These give an idea on how safe the fund is. I remember reading somewhere that Kotak gilt has not give negative return after being invested for like 6 months or something, do check.

PS: I hold SBI and Kotak gilt funds.

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31

Hi,

Is there any Fixed Maturity Plan, say 15 years.

Also it should be closed end

32

Bharat bond is a fixed target maturity ETF one of it is maturing In April 2031 and one in April 2033. On MFs i do not know If there is one.

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33

If you can consider low cost Closed MF type with Stock price appreciation for is "Tata Investent " they are holding almost all of TATAa group stocks listed and unlisted , its proxy for "TATA sonsā€™ their main income is Dividends from TATA group companyā€™s :slightly_smiling_face:

34

Hi,

How about arbitrage mutual funds? Can they be safe like Glit Funds?