In the ever-churning waters of the financial market, investors constantly seek safe harbors to navigate volatility and preserve their hard-earned capital. Enter the gilt fund, a type of debt fund that prioritizes stability over high returns. But before you dive in, let’s explore what gilt funds are, their potential benefits and drawbacks, and whether they deserve a place in your portfolio.
What are Gilt Funds?
Gilt funds are mutual funds or ETFs that invest primarily in government securities, such as treasury bills, bonds, and gilts (British government bonds). These securities offer a low risk of default, as they are backed by the creditworthiness of the government, making them a haven for risk-averse investors.
Suitable For: Investors who wish to invest money for a longer period but whose top goal is the safety of their assets.
Benefits of Gilt Funds
- Low Risk: As mentioned earlier, the minimal credit risk associated with government bonds makes gilt funds a highly secure option for preserving capital.
- Regular Income: Gilt funds generate regular interest payments, known as coupons, from the underlying bonds. This income stream provides a steady flow of returns for investors seeking stability.
- Hedge against Inflation: Gilt funds can act as a hedge against inflation, as government bonds tend to benefit from rising interest rates. This can help protect your portfolio from the eroding effects of inflation.
Read: Impact Of Inflation On Mutual Fund Returns
- Liquidity: Gilt funds are generally highly liquid, meaning you can easily buy or sell your shares without significant difficulty. This makes them suitable for investors with short-term investment horizons or those needing quick access to their funds.
Risks Associated with Glit Funds
- Maturity matters: Like a roller coaster, longer rides bring bigger thrills (and spills!). For gilt funds, this translates to higher risk with longer maturities. These funds, holding bonds with up to 10-year terms, are more vulnerable to market fluctuations compared to their shorter-maturing counterparts. Think of it as swaying in a strong wind – the longer the kite string, the wilder the wobble.
- Interest rate tango: Gilt funds dance to the tune of interest rates, and the music can get intense at times. Rising rates lead to losses, as investors chase newer, higher-yielding instruments, leaving older bonds (and your fund) behind. But fear not, the flip side comes with falling rates. Just like finding a bargain at a clearance sale, bond prices climb when rates drop, boosting your gilt fund’s returns as the demand for government securities grows with their sweeter interest offerings.
When should you buy Gilt Funds?
To understand when to invest in gilt funds, one must first realize that the price of gilts is inversely related to the movement of interest rates.
Because interest rates and bond prices have an inverse connection, a decline in interest rates leads to an increase in bond prices, and vice versa. Investors should keep a watch on the indications that suggest a drop in interest rates and invest at the appropriate moment.
When interest rates are predicted to rise, it is best to invest in long-term funds rather than short-term funds.
Read: How To Make Rs 1 Crore With Mutual Funds?
Historic Returns – Gilt funds
| Scheme Name | AuM (Rs Cr) | 1 Year | 2 Years | 3 Years | 5 Years | 10 Years |
| Bandhan Government Securities Fund – Investment Plan – Direct Plan – Growth | 1,417.24 | 7% | 4% | 4% | 8% | 9% |
| DSP Government Securities Fund – Direct Plan – Growth | 696.45 | 7% | 5% | 5% | 8% | 9% |
| Invesco India Gilt Fund – Direct Plan – Growth | 22.84 | 7% | 5% | 4% | 6% | 8% |
| Tata Gilt Securities Fund – Direct Plan – Appreciation | 290.73 | 8% | 5% | 4% | 7% | 8% |
| Union Gilt Fund – Direct Plan – Growth | 144.86 | 7% | – | – | – | – |
| Aditya Birla Sun Life Government Securities Fund – Direct Plan – Growth | 1,643.58 | 7% | 5% | 5% | 8% | 10% |
| Canara Robeco Gilt Fund – Direct Plan – Growth option | 97.90 | 7% | 5% | 4% | 7% | 9% |
| UTI Gilt Fund with 10-year Constant Duration – Direct Plan – Growth | 160.38 | 7% | – | – | – | – |
| UTI Gilt Fund – Direct Plan – Growth | 558.80 | 7% | 5% | 4% | 7% | 9% |
| Nippon India Gilt Securities Fund- Direct Plan – Growth | 1,578.84 | 7% | 5% | 4% | 8% | 10% |
| Nippon India Gilt Securities Fund- Direct Plan – Automatic Capital App | 1,578.84 | 7% | 5% | 4% | 8% | 10% |
| Edelweiss Government Securities Fund – Direct Plan – Growth | 134.41 | 6% | 5% | 5% | 8% | – |
| Axis Gilt Fund – Direct Plan – Growth | 214.78 | 7% | 5% | 5% | 8% | 8% |
| HSBC Gilt Fund – Direct Plan – Growth | 211.11 | 6% | 5% | 4% | 7% | 9% |
| Kotak Gilt – Investment – Direct Plan – Growth | 2,935.32 | 8% | 6% | 5% | 8% | 9% |
| Kotak Gilt – Investment – PF and Trust – Direct Plan – Growth | 2,935.32 | 8% | 6% | 5% | 8% | 9% |
| LIC MF Gilt Fund – Direct Plan – Growth | 46.45 | 6% | 5% | 4% | 7% | 8% |
| HDFC Gilt Fund – Direct Plan – Growth | 2,404.79 | 7% | 4% | 4% | 6% | 8% |
| SBI Magnum Gilt Fund – Direct Plan – Growth | 7,764.84 | 8% | 6% | 5% | 8% | 10% |
| PGIM India Gilt Fund – Direct Plan – Growth | 122.18 | 7% | 5% | 5% | 7% | 8% |
| Baroda BNP Paribas Gilt Fund – Direct Plan – Growth | 1,351.73 | 7% | 4% | 4% | 7% | 8% |
| Quant Gilt Fund – Direct Plan – Growth | 57.52 | – | – | – | – | – |
| ICICI Prudential Gilt Fund – Direct Plan – Growth | 4,399.18 | 9% | 6% | 6% | 8% | 10% |
| Franklin India Government Securities Fund – Direct – Growth | 129.65 | 5% | 4% | 4% | 6% | 8% |
Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. The information is based on various secondary sources on the internet and is subject to change. Please consult with a financial expert before making investment decisions.
