Best Gilt Mutual Funds

The individuals who are most suited to invest in gilt funds are:

1. Investors Who Seek Exposure to Debt Investments

These funds assist an investor to be part of debt investments in mutual funds. Since they only invest in government securities, it makes them a reliable source of investment. 

2. Investors with Zero Risk Tolerance

Given that gilt bonds hold government securities as their only underlying asset, it does not come with market risks. It can be an alternative to term deposits because it holds zero risks for the investor. 

3. Investors About to Retire

Investors who are about to retire usually look out for options to start investing in risk-free and reliable options. Moreover, they cannot take market-related credit risk and the strain of managing funds. Therefore, gilt funds can be a reliable option with reasonable returns and under the expertise of a fund manager.

4. Investors Who Want to Balance their Portfolio

Investors who look forward to balancing their portfolios with stable and risky funds can add gilt funds to their portfolio, given that it does not carry risks.

The major attributes to be considered before investing in gilt funds are:

1. Costs: The operational expenses of a specific fund may be determined by the fund manager's investing strategy. This applies even in the case of gilt funds; therefore, before you can choose a fund, you need to be aware of the expense ratio. 
2. Returns: This fund carries no credit risk, given that the underlying assets are government securities. However, they do carry some amount of interest rate risk based on economic conditions. 
3. Investment Horizon: These funds have medium to long-term maturity periods, and the average period to stay invested in this fund is three years. If you wish to invest in it, you must have an investment horizon ranging from at least 3 to 5 years.
4. Taxes: Your capital gains earned from gilt funds will be taxed; although the percent will be based on your holding period, you will have to be aware of the rates.

Here are some major advantages of investing in the top gilt mutual funds –

Low credit risk: Since gilt funds invest in government bonds and securities, they carry minimal credit risks, unlike mutual funds that invest in corporate bonds. 

Capital protection: Chances of capital loss with the best gilt funds is minimal as they invest significantly in government-backed securities.

Reasonable returns: Gilt funds offer significant returns over a mid to long period. 

Flexible investment modes: One can invest in gilt funds in one of two ways – SIP and lump sum. A Systematic Investment Plan is where investors deposit a fixed sum periodically. This sum can be as low as Rs.100. The lump-sum mode requires one to deposit their investment only once.

Here are the core risks that may be associated with best performing gilt funds-

1. Interest Rate Risk

Bond prices always have an inverse correlation with the interest rate movement. This states that if the interest rate increases, then the price of the bond decreases, and vice-versa. The sensitivity of the price of the debt instruments to fluctuation is known as interest rate risk.

2. Duration Risk

Longest-duration gilt funds have the highest duration risks because the maturities of gilt funds range from 90 days to more than 30 years. Longer-term gilt funds carry higher duration risks, although if the intention is to hold the bond to maturity, this risk is often mitigated.

FAQs

Q1. What is the meaning of a gilt fund?

Gilt funds come from the category of debt funds but invest exclusively in bonds and fixed interest-bearing securities that are issued by the government. 

Q2. Is a gilt fund better than a fixed deposit?

Though gilt funds could easily beat a 10-year bank fixed deposit rate over the long tenure, it cannot be assured that they are not market-linked. So, considering these, you will have to consider the viability of a gilt fund and if it matches your financial goals. 

Q3. Are gilt funds a good investment?

Gilt funds are typically the most lucrative since interest rates have room to decline, giving opportunities for capital gains. 

Q4. What is the difference between a gilt fund and a debt fund?

Gilt funds are a type of debt mutual fund, but gilt funds invest only in bonds and fixed interest-bearing securities that are issued by the state and central governments. 

Q5. What is the difference between a gilt fund and a gold fund?

Gilt funds are those securities that are issued by the Indian government. Gold funds are the investment funds that hold assets related to gold.

Disclaimer: Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.