Gilt funds are regarded as secure investment funds since most of the assets held by these funds are in government securities.
In 2025, with economic changes and market uncertainty, many investors are considering gilt funds for their portfolios. Compared to equities or corporate bonds, gilt funds are considered to be less risky as a government backs them. However, they still have their risks which are mainly interest rate risks.
This article explores whether gilt funds are a smart choice for investors in 2025, weighing the pros and cons to help you decide if they suit your financial goals.
What are Gilt Funds?
Gilt funds are mutual funds that primarily invest in bonds issued by the government to generate funds.
It is desirable to have these funds as they are government-backed and considered safer than stocks or other corporation bonds.
Nonetheless, their returns are reliant on fluctuations in interest rates.
When interest rates drop, the value of gilt funds rises and the opposite happens when interest rates rise. Gilt funds are usually the choice of investors with a low-risk appetite who want returns without any major fluctuations.
Advantages of Gilt Funds
Here are the key advantages of investing in gilt funds:
- High Safety and Security: Gilt funds are investments in government securities that rank among the safest forms of investment. Since it is the government that backs such securities, the risk of default is very low.
- Stable Returns: Gilt funds provide relatively stable returns, especially during uncertain times related to the economy or unstable market conditions. They don’t usually see big ups and downs like stocks.
- Interest Rate Gains: Generally, the interest rate tends to increase the gilt funds with downward trends. Such investments are usually impressive in a world where interest rates are lowering.
- Good for Risk-Averse Investors: Gilt funds are a good option for conservative investors who prioritize safety over high returns. They provide a stable, low-risk investment choice.
- Diversification: Gilt funds are beneficial and assist in the diversification of the portfolio as they provide cushioning when paired with riskier investments such as equities. They aid in distributing risk across plenty of investments.
- High Liquidity: Gilt funds have lower liquidity, thus you can easily acquire or sell the units when required, which may be helpful if you want to have immediate access to funds.
Drawbacks of Gilt Funds
Gilt funds have their own set of risks:
- Interest Rate Changes: When interest rates go up, the returns on gilt funds can go down. This is because bond prices and interest rates move in opposite directions, which can impact the returns on these funds.
- Low Liquidity: Although investing in government securities through gilt funds is safe, it’s not as easy to buy and sell them quickly, unlike stocks. Switching government bonds can be challenging.
- Costs: Gilt funds come with a management fee, capped by SEBI at 2.25% of the NAV. It’s important to check this cost before choosing a fund.
- Investment Period: Gilt funds typically invest in government bonds that have medium- to long-term maturities, often between three to five years.
Who Should Invest in a Gilt Fund?
Gilt funds are ideal for investors who want a safe and steady investment, like those nearing retirement or those who don’t want to risk losing their money in the stock market.
For example, if someone plans to retire in 10 years and wants to secure a stable income without much risk, a gilt fund can be a good option. Investing through a Systematic Investment Plan (SIP) can make this even easier by allowing them to invest a fixed amount monthly.
To plan your investment amount, you could use a SIP calculator, which shows how small, regular investments grow over time in gilt funds.
Conclusion
Gilt funds can be a good option for those seeking safety in their investments, especially during uncertain times. However, they may not offer high returns compared to other options. Investors looking for stability over high growth may find gilt funds suitable. Always consider your financial goals and risk tolerance to decide if gilt funds match your needs in 2025.
