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Gilt funds are safest option for investors

If the halving of equity investments has set you thinking on ‘low risk’ products, try gilt funds. Among the family of debt products, they offer the highest returns on low — but not zero — risk.

business Updated: Oct 19, 2008 21:11 IST

If the halving of equity investments has set you thinking on ‘low risk’ products, try gilt funds. Among the family of debt products, they offer the highest returns on low — but not zero — risk.

The debt market is getting ripe for returns, right from the top. A 250 basis point (100 basis points make 1 percentage point) cut in the percentage of money banks have to keep as cash with RBI has brought in liquidity worth Rs 1,00,000 crore into the system.

“The crash in Sensex has impacted investors’ sentiment and they are going for gold and debt funds,” said Sudip Bandyopadhyay, CEO, Reliance Money. “Bank deposits are also being seen as safe investment option.”

In an environment where ‘safety of investment’ has emerged as the prime concern, gilt funds — mutual funds that invest in government securities — are the safest.

“It is time to be cautious but not be worried,” said Rama Vasantharajan, head (fixed income research), Crisil. “Mutual funds or banks do not go beyond a certain credit risk profile. The default probability of debt papers in FMPs (fixed maturity plans) is very low.”

On safety, gilt funds top the list with almost zero credit, provided they are held to maturity. Bank fixed deposits and FMPs of mutual funds that invest fully either in banks corporate debentures or AAA rated paper, come next. Debt funds, which are exposed to corporate papers and where the quality of paper keeps changing quickly, carry the highest risk on safety.

“Considering the current crisis, gilt is the best place to park money for the medium- to long-term as it is safe and also because the interest rates are likely to go down,” said Amar Pandit, a Mumbai based financial planer.
On the returns front, FMPs lead the pack with 11 per cent. An 18-month FMP provides indexation benefit for two years, thus reducing the tax liability.

Gilt funds follow but interest rate movement impacts their return. Fixed deposits with banks are in line with gilt funds on returns parameters. Medium-term debt funds lag these on return.

“Fixed maturity plans are good for investments of up to 18 months as the tax liability is almost zero and the chances of default are low,” said Surya Bhatia, a Delhi-based financial planner. Besides, FMPs don’t carry interest rate risk as they are locked in till maturity. On an average, over the past one year, return on a medium- to long-term gilt fund stands at 9.3 per cent.