Financial Glossary Header Image

Gilt Fund

Updated on March 11, 2023

Mutual funds which invest in government securities only are called Gilt Funds. Investors who want to stay with safe and secure investments with minimum risk prefer Gilt Funds. Government bonds come with a sovereign guarantee and almost zero credit risk. Hence they offer a high level of safety to the investors’ capital. They can be categorised as short, medium or long term, depending on the maturity. Although credit risk is low, these funds come with interest rate risk.

What are the features of Gilt Funds?

Key features of Gilt funds are:
1. These are debt funds which invest in bonds and fixed interest securities issued by the government.
2. The securities have varying maturities and come with lowest risk of default.
3. Gilt funds protect investors’ capital, give reasonable returns but are affected by interest rate changes. If the interest rates rise, the NAV of the Gilt Fund falls.

What are the benefits of Gilt Funds?

Certain benefits of Gilt funds are:
1. Gilt fund is a good investment option for people with low risk tolerance
2. There is zero or minimal risk of default
3. They provide stable returns with safety of capital

What are the drawbacks of Gilt Funds?

Limitations of Gilt Funds:
In case of a rise in interest rates in the economy, the NAV of a Gilt Fund falls, as bond rates are inversely related to the interest rates. However, if interest rates start falling, the bond prices rise and Gilt funds become profitable for investors.