What is Gilt Mutual Fund? Gilt funds are mutual funds that invest only in government securities. They are preferred by safe and conservative investors who like to invest in secured government bonds. Since gilt funds invest only in government bonds, investors are protected from credit risk. The instruments where these gilt funds invest have a sovereign guarantee. Hence very low default risk is associated with these funds.
So this was a general idea on what is a gilt mutual fund. Now let’s discuss the maturity periods. Gilt funds can have different maturity periods. Some funds can be of short term and some can be of medium and long terms. Like another type of bond funds, these funds also have interest rate risk associated with them.
What is the difference between a gilt fund and a bond fund?
Gilt funds differ from normal bond funds because bond funds invest in corporate bonds, government securities, and money market instruments. Gilt funds only invest in high-quality low-risk debt instruments, government securities. So as whole gilt funds are more secure than normal bond funds.
Whether Gilt fund is suitable for long term investment?
The gilt fund may be suitable for investing in uncertain times as they invest in more secured instruments. But I do not recommend them for long term investment. Because though they invest in the most secure instruments but little change in interest rates and gilt values change dramatically. Only the gilts in India are available with longer maturity. In very longer maturity they turn up to be very volatile.
The reason for the volatility is if you buy a 15 year OR 20-year bond the likelihood of interest rate going up or down changes the value dramatically and ultimately makes it useless for the long term. Rather invest in gilt funds in uncertain times like demonetization etc.