What are gilt mutual funds?

Within the family of mutual funds, resides a fund that seeks to offer relative stability and steady income potential – gilt mutual funds. In this article, we will understand gilt mutual funds, their advantages, associated risks, and the type of investors they suit the most.

Meaning of gilt mutual funds

Gilt mutual funds, often referred to as government securities funds, are a specific category of mutual funds that mainly invest in government securities. These securities are issued by the government and offer the potential for regular interest payments and no credit risk as the papers as backed by the government.

Benefits of investing in gilt funds

Investing in gilt funds offers several advantages for investors. These funds primarily invest in government securities, which are considered low-risk due to the backing of the government. Benefits include:

Relative stabilityThe primary advantage of gilt funds is the relative stability they offer. Since these funds predominantly invest in securities that are backed by the government, they are considered comparatively low risk.

Steady income potential: Gilt funds generate a steady income for investors through the interest payments made by the government on the securities. This income is available to investors who have invested in Income distribution cum capital withdrawal option (IDCW).

No credit risk: Unlike corporate bonds, government securities come with no credit risk since they are backed by the government.

Portfolio diversification: Including gilt funds in a diversified investment portfolio can add a layer of relative stability.

Risk involved in gilt funds

Gilt funds, while offering benefits like relative stability through investments in government securities, carry certain risks that investors should consider. Mentioned below are a few risks involved in gilt funds:

Interest rate risk Gilt funds are sensitive to changes in interest rates. If interest rates rise, the prices of existing bonds may fall, leading to capital losses for investors.

Inflation risk: Inflation erodes the purchasing power of money over time. Gilt funds, while providing a relatively stable investment avenue, may not always keep pace with inflation.

Market risk:Economic factors, geopolitical events, and changes in investor sentiment can impact the performance of gilt funds.

Who should invest in gilt mutual funds?

Investing in gilt mutual funds is suitable for investors seeking a balance of relative stability and predictable returns in their portfolios. This fund can be a suitable option for the following investors:

Conservative investors: Gilt funds can be a suitable choice for conservative investors seeking relative stability and consistent return potential.

Income seekers: Investors looking for a regular and steady income stream may find gilt funds appealing and can consider investing in the IDCW option of Gilt Funds.

Diversification seekers Investors aiming to diversify their portfolio and reduce overall risk may consider allocating a portion to gilt funds.
Gilt funds come with the advantages of relative stability, steady income potential, and no credit risk. However, investors need to be mindful of the associated risks, particularly related to interest rate movements and inflation. These funds might not be the most favoured, but they can play a crucial role in providing a relatively stable option for people seeking a reliable and predictable investment avenue.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.