What is a Gilt Fund: Gilt Fund Meaning, Features, Risk & Returns

Government-backed securities are known to be one of the safest investment options. By investing in such securities, gilt mutual funds offer a dynamic blend of decent returns and low risk. Read this post to know what these funds are, how they work, their features, returns, and more.

Getting Started with Gilt Fund

Diversification is crucial for building a well-balanced mutual fund portfolio. Your investment should be spread across different types of funds with varying levels of risks as per your investment profile and financial objectives. If you are aiming to add more safety to your portfolio, gilt funds deserve your attention. It is a type of debt fund that aims to deliver reasonable returns with minimum risk. Take a look at what is a gilt mutual fund and understand their basics in detail.

What are Gilt Mutual Funds?

Gilt funds are one of the oldest investment options in the UK. Britishers deserve credit for introducing gilt funds in India. As India was once a British colony, gilt funds have been in India since the pre-independence period.

In simple words, 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. So, 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 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

Now that you know what are gilt mutual funds and the average returns they could deliver, let us have a look at some of their top benefits-

  • 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 fulfil its obligations. The same is not true in 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. So, 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

Along with understanding gilt funds meaning and benefits, one should also know the risks. The biggest risk in gilt funds is that of the fluctuating interest rate. 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.

Talking about the disadvantages, the only thing worth mentioning is the illiquidity of government securities in which gilt funds generally invest. As these securities are highly illiquid, the fund manager can't exit the investment in case of an emergency.

Who Should Invest in Gilt Funds?

If you have understood what is gilt fund in mutual fund, it shouldn't be difficult for you to decide whether or not they are the right choice for you. 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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