What is a Gilt Fund? (Meaning, Features, Risk and Returns)

Government-backed securities are known to be one of the safest investments options. By investing in such securities, gilt mutual funds offer a dynamic blend of decent returns and low risk. Let’s understand what gilt funds mean, how they work, what their risks and returns look like etc.

What are Gilt Mutual Funds?

Gilt funds are one of the oldest investment options in India; these existed even during the pre- independence period. Essentially, gilt funds invest your money in debt securities issued by the government. As securities offered by the government are known to be a safe investment avenue, gilt funds are an excellent choice for risk-averse investors.

The debt securities generate interest income through which the gilt fund investors earn their returns. The performance of any gilt fund depends on how the interest rate moves. Hence, gilt funds are highly recommended during the falling rate regime. It is because as the interest rates fall, prices start rising. This leads to an increase in the Net Assest Value (NAV) of gilt funds. Due to this reason, a lot of investors switch to gilt funds when the interest rates start falling.

What are the returns you can expect from a gilt fund?

The returns from a gilt fund depend on the repo rate fixed by the RBI. As repo rate changes are not very regular, gilt funds have a reputation for delivering consistent returns. The returns tend to get higher if the repo rate is reduced and falls when the repo rate rises

In the past few years, top gilt funds have been able to consistently deliver annual returns in the range of 10%-15% and above. This is considerably higher than many other investment options like bank FDs.

Benefits of Investing in Gilt Funds

  • Zero Credit Risk

    Unlike mutual funds that invest in corporate bonds where there is always significant credit risk, gilt funds have zero credit risk. This is because the government generally fulfils its obligations. The same cannot be guaranteed in the case of corporate bonds.

  • Capital Protection

    While no mutual fund offers 100% capital protection, gilt funds are one of the few that carry minimal risk. Investments are made in government-backed securities, and the chances of any significant capital loss are close to none.

  • Invest in Securities Not Available to Retail Investors

    Most of the government securities are unavailable to retail investors. But, institutional investors like fund houses are allowed to subscribe to such securities. By investing in gilt funds, you get to invest in such government securities indirectly.

  • Reasonable Returns

    As compared to many other investment options, gilt funds offer decent returns even if you are investing for short to medium term. Combined with the minimum risk, this is an excellent option for risk-averse investors.

Risks and Disadvantages of Investing in Gilt Funds

The biggest risk in gilt funds is that of the fluctuating interest rates. The returns can fall considerably if the RBI increases the repo rate. Apart from this, there is no significant risk of investing in gilt funds.

Moreover, gilt funds are considered to be quite illiquid securities. This implies that if an investor wants to exit his position and liquidate his investments in case of an emergency, he won’t be able to do so easily.

Who Should Invest in Gilt Funds?

Risk-averse investors generally prefer gilt funds with a short to the medium-term investment horizon. If you already have a mutual fund portfolio, especially one that is more inclined towards equity, gilt funds are a great choice to add more diversification and stability

While the returns are not as high as what top equity funds could offer, they are highly reasonable, and more importantly, come with minimum risk.

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