A complete guide to understanding gilt funds

What are Gilt Funds and are they completely risk free? - Anupam Roongta

When it comes to building an investment portfolio, there are no one-size-fits-all solutions. Depending on the risk appetite of an investor and their expected rate of return, different options can be explored. While most investors may want aggressive growth, there are certain investors looking for safe investments with capital preservation as a priority. Here, debt funds can be a wise investment. Among the different types of debt funds, gilt funds are well-known due to their low-risk profile amongst investors. 

Here is a complete guide on gilt funds that will provide insight into how they work and why they may be an attractive investment for those seeking capital appreciation without being exposed to high risks.

What is a gilt fund?

Gilt funds are debt mutual funds that predominantly invest in government securities (G-secs). Benefiting from the security provided by the government, gilt funds are often seen as a safe investment option with reasonable returns.

How do gilt funds work? 

Through gilt funds, the Government of India can receive loans to meet its funding needs. The process begins when the Reserve Bank of India (RBI) agrees to lend money to the government after borrowing from other entities such as banks. In exchange, the RBI issues government securities with an agreed-upon tenure, which are purchased by a fund manager of a gilt fund. When these securities mature, the fund manager returns them to the government and collects payment in return.  

As per SEBI regulations, these mutual fund schemes must have at least 80% of their corpus invested in G-secs. The fund manager of the scheme decides which type of security to invest in based on their assessment of market conditions and interest rate movements. However, it is noteworthy to mention that gilt funds are susceptible to changes in interest rates, and any sharp movement could lead to significant losses or gains respectively. 

Advantages of gilt mutual funds

  • Zero credit risks

Since gilt funds mainly invest in government securities, they do not carry any credit risk or default risk, unlike corporate bonds, where there is always the possibility of defaulting on payments due to company insolvency or other factors. Because of this, gilt fund returns tend to be lower than those offered by corporate debt schemes, but they carry significantly lower risks as well. 

  • Exposure to government securities

Investing in gilt mutual funds can be a great way to get exposure to government securities that are otherwise not easily accessible to individual investors. Also, the main benefit of investing in such funds is that they offer diversification along with slow but assured capital appreciation. 

  • Can be held for a long term

To make the most of these investments, it is advisable to invest for at least five years. This enables investors to take advantage of soft interest rates. For example, the interest rates could start rising, and the trend may remain the same for the next two years before they start to fall – thus favouring gilt fund investors.

However, it is equally important to select the best mutual funds to invest in by thoroughly researching various options and seeking professional advice.

Final words

Gilt funds can be an extremely valuable asset to stabilise and maximise portfolio returns. Moreover, with the rise of digital platforms and mutual funds investment apps, one can invest in best gilt funds easily with minimal regulations and paperwork. Simply visit a bank’s/mutual fund house website or their app, then navigate to the mutual fund section. There, investors can browse through different funds and choose the one that matches their goals and risk profile best. 

However, gilt funds, being debt instruments, derive their risk from interest rate movements. Thus, careful research and analysis of risk associated with these funds is recommended before investing.

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