The term ‘Gilt’ is of British origin. The British called ‘Gilt edged securities’ to the bonds and the securities issued by the British Government (through Bank of England) on behalf of His/Her Majesty’s Treasury, whose paper certificates had a gilt edge. The term Gilt edged securities is used in India for the Government securities like Central Government loans and State Government loans because they carry no risk similar to that of British Government securities. In US these type securities are referred as US Treasury securities.
How it works?
When the Government of India needs funds it approaches to RBI, the banker to the Government, for funds/loan. RBI issues government securities for required amount at a fixed interest returns having a specific tenure of maturity like 1-year, 3-years, 5-years and 10-years. Funds Managers of NBFCs, Provident Funds, Pension Funds, Mutual Funds, Insurance Companies, Cooperative Banks, Regional Rural Banks, Trusts, Corporates, and Individuals etc. subscribe to these securities. By this way, in returns to loan to the Government RBI issues Government securities to collect requirement of funds.
A gilt fund provides better asset quality compared to equity and other debt instruments, although the returns might be relatively lower. Since the returns are highly dependent on the movement of interest rates, a falling interest rate regime would be the best time to invest in gilt funds.
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