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Best gilt mutual funds to invest in 2020

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Last Updated: Jun 12, 2020, 11.22 AM IST
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Summary Gilt mutual funds are considered ideal for long-term debt mutual fund investors with an aggressive risk profile. However, these schemes are extremely sensitive to interest rate environment.

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Gilt mutual funds are enjoying their spot under the sun. Thanks to a series of rate cuts by RBI, the category has been offering double-digit returns in the last one year. The average return offered by the category is 13.39%%, while toppers in the category has managed to offer around 15-17% returns in the last one year.

However, do not rush to invest in these schemes simply because of the higher returns. Gilt mutual fund category has some unique features. It is extremely important to understand them before investing in the category.

To begin with, gilt mutual funds invest mostly in government securities. Due to this, these schemes have almost nil default risk. However, they have very high interest rate risk. The gilt mutual fund category is extremely sensitive to interest rate environment. They give double-digit returns during soft interest rate scenario like the current one. As said earlier, the category is offering very high returns as there are widespread expectations of a further rate cuts by the Reserve Bank of India. However, they suffer the most when the rates start hardening. They may offer negative returns in such periods.

This is the reason why Gilt mutual funds are recommended only to long-term debt mutual fund investors with an aggressive risk profile. It is extremely important to get in and out of these schemes at the right time. Simply put, investors can make very high returns if they can get into these schemes just when the rates start falling. They also should get out just before the rates start hardening to avoid big losses.

Many regular investor find it very hard to execute. That is why most mutual fund advisors ask investors to stick to debt mutual funds with short investment horizons.

Here is an update on our recommended gilt mutual fund schemes for June. The good news is that there are no changes to the list. All the schemes that were part of our recommendation list managed to retain their spot in the list.

In short, if you have a long-term investment horizon and a stomach for volatility, you can invest in gilt schemes to earn higher returns. However, you should remember that these schemes might go through a bad phase whenever the interest rates start going up. If you want to take some risk and earn extra returns in these schemes, here are five gilt schemes that you may consider investing.

Best gilt mutual funds to invest in 2020
Nippon India Gilt Securities Fund
UTI Gilt Fund
ICICI Prudential Gilt Fund
SBI Magnum Gilt Fund
Aditya Birla Sun Life Government Securities Fund

ETMutualFunds.com has employed the following parameters for shortlisting the debt mutual fund schemes.

1. Mean rolling returns: Rolled daily for the last three years.

2. Consistency in the last three years: Hurst Exponent, H is used for computing the consistency of a fund. The H exponent is a measure of randomness of NAV series of a fund. Funds with high H tend to exhibit low volatility compared to funds with low H.
i)When H is equal to 0.5, the series of return is said to be a geometric Brownian time series. These type of time series is difficult to forecast.
ii)When H is less than 0.5, the series is said to be mean reverting.
iii)When H is greater than 0.5, the series is said to be persistent. The larger the value of H, the stronger is the trend of the series

3. Downside risk: We have considered only the negative returns given by the mutual fund scheme for this measure.
X =Returns below zero
Y = Sum of all squares of X
Z = Y/number of days taken for computing the ratio
Downside risk = Square root of Z

4. Outperformance: Fund Return – Benchmark return. Rolling returns rolled daily is used for computing the return of the fund and the benchmark and subsequently the Active return of the fund.

Asset size
: For Debt funds, the threshold asset size is Rs 50 crore.

(Disclaimer: past performance is no guarantee for future performance.)

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