What is the difference between a Gilt Fund and other debt funds?

The main difference between them lies in their investment mandate. Gilt Funds are a special category of debt funds that invest only in government securities (G-Secs) issued by the central and state governments and, thus, make them virtually risk-free of credit risk. In contrast, other debt funds invest in a wider range of debt instruments like corporate debt, money market instruments and other fixed income instruments that have a higher credit risk depending on the issuer.

What are Government Securities (G-Secs)?

G-Secs are the Government securities or the tradable instruments issued by the Central Government or the State Governments representing the obligation of the government to pay the debts. They can be short-term (Treasury Bills) or long-term (Government bonds or dated securities). In India, the Central Government issues both, whereas the State Governments issue only bonds or dated securities known as State Development Loan (SDLs).

Are Gilt Funds suitable for short-term investing?

Gilt Funds are funds that invest in Government securities with a medium to long-term maturity period, with an average portfolio maturity between three and five years. While there is no lock-in period, their sensitivity to changes in interest rates means that short-term investments may be at risk of higher volatility in returns. For short to medium term wealth accumulation, especially in times of market downturns or volatility in interest rates, they could be considered, but an investment horizon of at least three to five years is often required to deliver better results.

Can I lose my principal amount in gilt funds?

Not permanently due to default (since the government guarantees repayment), but yes, you can suffer a temporary capital loss due to interest rate fluctuations. While the underlying government securities will always honour their face value at maturity, the NAVs of the gilt funds fluctuate daily based on interest rates in the market. However, if you stay invested, over time, as bonds get close to maturity and accrue interest, values tend to recover. The key is having a long-term investment horizon.

How can I invest in Gilt Funds?

u can invest in Gilt Funds through AMC websites or brokers such as Dhan. For investing in the Gilt funds on Dhan, you must create a demat account and then complete the Know Your Customer and other details. After you finish the entire process, you can add funds and start your investing journey in gilt funds.