While equity mutual funds may be the most widely spoken about, there are several other types of mutual funds out there that help investors meet different kinds of financial goals. That’s because each mutual fund type carries a different risk-reward portfolio and is suitable for different investment horizons and financial profiles. There are many mutual funds that are designed for conservative investors and offer good quality investments with low risk. Gilt funds are one of them. Gilt funds are a type of debt mutual fund that purely invest 80% of their portfolio in securities issued by the central and state governments. Here is everything you need to know about gilt funds. 

  1. Gilt funds are low-risk investments 

Gilt funds primarily invest in government securities such as government bonds and hence they are preferred by conservative investors who don’t want to invest in risky securities. Government bonds come with the sovereign guarantee of the Government of India, which means that unlike corporate bonds, the government cannot default on paying interest or repaying your capital. 

  1. Gilt funds are long-term investments 

A gilt mutual fund’s portfolio’s average maturity is five to ten years depending on the fund. This means that these funds make for good medium- to long-term investments. Hence, these are not the debt funds you should opt for if you are looking for short-term investments. Instead, you can consider short-term mutual funds or liquid funds. Gilt funds are suitable if you have an investment horizon of at least three years or more. 

  1. Gilt funds are impacted by interest rate changes 

Gilt funds are dependent on the interest rate environment and hence their returns are also impacted by changes in interest rates. For instance, when the interest rates in the economy fall, the returns of gilt funds may be higher. Alternatively, if the interest rates rise, the gilt fund returns may fall. Hence, while gilt funds are free from default risk, the capital you invest and the returns you earn are not guaranteed. 

  1. Gilt funds can generate good returns

Compared to other types of debt funds, gilt funds can generate higher returns. There have been times when certain gilt funds have given 7% to 9% returns. However, the interest rate environment plays a big role in this. Hence, gilt funds can be a good investment when interest rates are falling. 

The bottom line 

Gilt funds are a great low-risk fixed-income investment for investors looking for capital preservation with some returns. Hence, if you are looking for investments with high credit quality and low risk, then look no further. It’s important to note that while gilt funds carry no credit or default risk, they do carry interest rate risk as their performance is impacted by changes in interest rates. Typically, gilt funds make for a good investment in a falling interest rate environment when you have an investment horizon of over at least three years.