The existence of gilt funds dates back to before India gained its independence, making them one of the country's oldest investment alternatives. Gilt funds are essentially debt funds that invest in government securities ranging from medium to long term horizons.
In accordance with SEBI requirements, gilt funds must invest at least 80% of their total assets in government securities that yield fixed income. These investments finance infrastructure initiatives put forth by the central and state governments, as well as other similar costs.
Gilt funds are regarded as a dependable investment choice for conservative investors seeking modest returns. The RBI-set repo rate affects the returns from a gilt fund. Since repo rate fluctuations are rarely frequent, gilt funds are known for providing reliable returns.
What are the advantages of investing in gilt funds?
Gilt funds have minimum to no credit risk, in contrast to mutual funds that invest in corporate bonds, where there is always a sizable amount of credit risk. This is due to the fact that the government often complies with its duties. In the case of corporate bonds, the same cannot be ensured.
Secondly, state and central governments often provide fixed income securities. The majority of them, however, are only available to banks and other institutional investors. You may essentially obtain exposure to government securities that you would not have otherwise had by investing in gilt funds.
Additionally, if you are investing for the short to medium term, gilt funds still provide respectable returns when compared to many other investment alternatives. This is a great choice for risk-averse investors because of the little risk involved.
Here are the top five gilt funds with their one- year returns.
| Name of the fund | 1-Year returns |
| SBI Magnum Gilt Fund-Reg(G) | 3.41 |
| ICICI Pru Gilt Fund(G) | 3.04 |
| Tata Gilt Securities Fund-Reg(G) | 2.34 |
| Axis Gilt Fund-Reg(G) | 1.99 |
| UTI Gilt Fund-Reg(G) | 1.87 |
Note: The above data has been compiled from FundsIndia.
Who should invest in these funds?
Investors that are risk averse typically favour gilt funds with a short- to medium-term investment horizon. Gilt funds are an excellent option to add extra variety and stability to an existing mutual fund portfolio, particularly one that is more leaning towards equity.
Even while the returns are lower than what the best equities funds might deliver, they are still quite acceptable and, more importantly, involve no risk.
However, the main threat to gilt funds is the change in interest rates. If the RBI raises the repo rate, returns may decrease considerably.Furthermore, it is believed that gilt funds are highly illiquid investments. This suggests that an investor won't be able to readily leave his position and liquidate his capital in the event of an emergency.
Top gilt funds have recently demonstrated a consistent ability to provide yearly returns between 10% and 15% and above. Compared to many other investing alternatives, such as bank FDs, this is significantly greater.
