Know why investing in a gilt fund via SIP can be a good idea
Mutual funds are a basket of professionally managed securities that invest in various asset classes and money market instruments to help investors achieve a common investment objective. Equity mutual funds are quite popular among investors as they offer long-term capital appreciation and risk-adjusted returns by predominantly investing in equity and equity-related instruments. Most investors invest in equity mutual funds via SIP because it allows them to save and invest a fixed sum regularly till their investment objective is accomplished. While SIPs are quite common among equity mutual fund investors, they can be considered for investing in debt mutual funds like gilt funds as well.
Let us fund out why investing in gilt funds via SIP can be a good idea. But before that let us explore what gilt funds are.
What is a gilt fund?
We all know that mutual funds like debt funds invest in government and corporate bonds, treasury bills, and other money market instruments to help the scheme achieve its investment objective. Gilt funds are debt mutual funds that invest in government-backed securities to generate stable returns with minimum investment risk.
In market regulator SEBI’s (Securities and Exchange Board of India) own words, gilt funds “invest exclusively in government securities. Government securities have no default risk. NAVs of these schemes also fluctuate due to change in interest rates and other economic factors as is the case with income or debt-oriented schemes.”
Why investing in gilt funds via SIP is a good idea?
There are two ways in which a retail investor can invest in gilt funds – they can make a lumpsum investment or they can opt for a Systematic Investment Plan. A lump sum investment is made the by investor right at the beginning of the investment cycle. This allows the investor to buy more units, but it also exposes their entire investment sum to volatility. On the other hand, a Systematic Investment Plan (SIP) allows investors to save and invest a fixed sum regularly in mutual fund schemes. They can decide how much money they want to invest in the gilt fund and then continue investing till their investment objective is achieved.
Benefits of SIP
Investing in gilt funds via SIP has its perks, here are some of them:
Benefit from rupee cost averaging
Investors can buy more units when the NAV of the gilt fund is low and more units when the NAV is high. This is referred to as rupee cost averaging, an investment technique that averages out the cost of purchase and allows investors to purchase more units in the long run.
Power of compounding
The term power of compounding is derived from compound interest, something that you must have learned in school. When your investments in gilt funds earn interest, and when these interest compounds and start earning interest of their own, this is known as the power of compounding. Through compounding, one might be able to transform their small SIP sums into a commendable corpus in the long run.
SIPs offer flexibility which lets investors stop or start their SIP investments at their convenience. No lock-in period allows investors to redeem their investments at any given time without having to pay any penalty. Investors can even increase their monthly SIP sum as there is no upper limit on SIP investing. However, one cannot invest a sum lower than what is mentioned in the scheme information document (SID).
Investors can consider gilt funds if they wish to earn stable returns with minimum investment risk. However, they must understand that these funds do not guarantee capital appreciation or aren’t entirely risk-free either.