Are Gilt Mutual Funds less risky? Is it the right time to invest in them?

In the last few years, we have realised the importance of not just investment but also early investments. And while the market is full of investment tools, including mutual funds, we can't deny the risk involved. Proper research is imperative before we invest our hard-earned money anywhere. Among the options is the Gilt Fund, a form of mutual fund that invests in bonds and fixed interest-bearing securities issued by the state and central governments. One can consider investing in gilt funds for both long-term and short-term plans as they come with a unique mix of returns, opportunities, and of course risks. It is said that investments carry minimal risks, one cannot completely ignore the risk factors.

Read to learn about the risks associated with gilt mutual funds and the right time to invest in them.

What are Gilt Funds?

A kind of debt fund, Gilt Mutual Funds are primarily invested in government securities (G-secs) issued by the Reserve Bank of India on behalf of the government. While they are considered safe as compared to other options, the returns are also quite low. The G-sec market is largely dominated by institutional investors, offering retail investors a convenient option to invest in government securities.

To understand how gilt funds work, we need to learn their types -- long-term and short-term funds. These funds benefit differently when the interest rates fall or rise, thus resulting in an appreciation in G-Sec price.

Given here are the factors that can determine the risks associated with gilt funds:

Maturity: The risk elements vary in term length in both cases. As long-term gilt funds carry bonds of up to 10 years of maturity, they are subject to higher risks. Simply put, due to longer maturity dates, gilt funds are more volatile than gilt funds with shorter maturity dates.

Interest rate: As gilt funds are susceptible to interest rate swings due to the long maturities of the underlying G-secs, they turn out to be more risky and highly volatile over short periods. This means that for gilt funds, the higher the duration, the higher the interest rate risk and vice-versa. 

- Rising interest rate: When interest rates go on an upward trend, gilt funds can face losses and sometimes also negative returns. This usually happens because investors tend to switch to some new securities that come with higher interest rates than older ones.

- Falling interest rate: When interest rates fall, bond prices move up and gilt funds tend to generate higher returns as the demand for government securities also rises to the higher offering of interests.

When to invest in Gilt Funds?

To understand the correct time to invest in gilt funds, one should understand that the price of gilts is inversely proportional to the movement of interest rates.

As there is an inverse relationship between interest rates and bond prices, a fall in interest rates leads to a rise in bond prices and this happens vice-versa. Investors should keep an eye on the indicators that indicate a fall in interest rates and invest at the right time.

It is advisable to invest in long-term funds when the interest rates can ease down and invest in short-term funds when the interest rates are expected to go up.