Gilt edged securities are those low risk securities issued by the government of a country. In India, the government issues securities of various maturities to raise money for their development agenda. What should investors prefer since direct investment in G-Secs can be quite complicated and institutional. There are two options to participate in government securities; G-Sec ETFs and Gilt Funds. Let us look at a comparison of the two.
How do Gilt funds and Gilt ETFs operate?
Gilt funds and Gilt ETFs funds typically invest in a basket of Gilts or debt instruments. Gilts are the other name for government securities. Gilt funds are mutual funds that contain a pool of capital from investors whereby the fund’s manager allocates the capital to various securities. A Gilt ETF is likely any passive ETF that tracks an index of Gilts with the goal of matching the returns of the underlying index. Both Gilt funds and Gilt offer diversification via portfolios that hold numerous Gilts. Both gilt funds and ETFs have smaller minimum required and that makes them more suitable for retail investors with limited capital.
Why do investors buy Gilts? Normally, the purpose is to generate regular and predictable income. In addition, the institutional intermediary like the mutual fund or ETF will also be continuously buying and selling Gilts to generate a profit from fluctuations in their prices or based on their view of interest movements. Investors also buy Gilts as they are less volatile than stocks. While Gilt ETFs are typically bought on the exchange with your online trading account with stock broker in India, the gilt funds are bought on regular or direct basis from the mutual fund.
What you need to know about Gilt funds
Mutual funds have been investing in Gilts for many years in India and here is what you need to actually know about gilt funds.
- Gilt funds are available as open-ended funds or as closed-end funds. Open-ended funds can be bought directly from fund providers. Closed ended gilt fund can also be purchased and sold from the secondary market, based on liquidity.
- Remember, open-ended funds are priced and traded only once a day after the market closes and the declared NAV by the fund is the basis for all customers on that day. The NAV in each day is net of proportionate TER allocated.
- Open-ended funds do not trade at a premium or a discount, making it easy and predictable to determine precisely how much a fund’s shares will generate if sold.
- While liquid funds are free of exit load, most gilt funds do have an exit load charged if the redemption is done before a period of 6 months from the date of purchase. That is done because the fund company wants to minimize the expenses associated with frequent trading.
- Gilt funds do not disclose their holdings on a daily basis but is included in the fact sheet at the end of the month.
What you need to know about Gilt ETFs
Here is what you need to actually know about gilt ETFs and they are normally benchmarked to a gilt index, which is normally maintained by professional organizations like CRISIL.
- Gilt ETFs a recent entrant globally and even in the US markets, it was only introduced in 2002. Most of these offerings seek to replicate various Gilt indices, although a growing number of actively managed products are also available.
- Gilt ETFs often have lower fees than their gilt funds. This potentially makes them more attractive to some investors over a longer period of time.
- Gilt ETFs operate like closed-end funds and can be purchased and sold through a brokerage account and held in custody in the demat account.
- ETFs trade like stocks through the day. The prices for shares can fluctuate and vary sharply over the course of trading. Extreme price fluctuations are seen during market volatility.
- Gilt ETFs do not have minimum required holding period, and so there is no exit load that is imposed for selling in a short time. This makes them suitable for traders.
How to make the choice: gilt funds versus gilt ETFs?
That depends on the investment objective of the investor. If you are looking for active management, Gilt mutual funds offer more choices. If you want to buy and sell frequently, Gilt ETFs are a good choice due to their lower costs.
The biggest caveat as in any investment is that it must fit into your long term financial goals and must be within your allocation limits. Rest of the points are more academic.