Investors usually seek out various investment opportunities to diversify their portfolios and maximise returns regardless of market volatility. Investing in debt funds and gilt funds are two attractive options for investors. However, some individuals are perplexed because gilt mutual funds are also a kind of debt fund with a higher allocation towards Central and State Government-backed securities. So, which is the right choice for higher and safe returns for risk-averse investors?
In this post, we will go through debt and gilt funds in-depth so that you may better understand them and make informed investing decisions.
What Are Debt Funds?
Debt funds are a type of mutual fund plan that invests in fixed-income securities. This comprises corporate and government bonds, corporate debt securities, and money market instruments, among other things. These funds are less volatile and offer capital appreciation with a lower risk than equity funds. There are different types of debt funds, including:
- Short-term funds
- Liquid funds
- Fixed maturity plans
- Gilt funds
- Long-term income funds
- Dynamic bond funds
- Monthly income plans
- Credit opportunity funds
Benefits Of Debt Funds
- Debt funds are highly liquid, allowing investors to sell their holdings quickly.
- They are an excellent hedge against the volatility of the equities market.
- They are low-risk financial products that provide stable returns.
What Are Gilt Funds?
Gilt funds mean debt funds that invest exclusively in government securities. These funds are required to invest at least 80% of their assets in government bonds. The gilt funds are classified into two types:
- Funds that invest in government assets with varying maturities.
- Funds that invest in government securities have a 10-year maturity.
There is no default risk since gilt funds exclusively invest in government securities. Additionally, these funds provide investors with reasonable returns while posing a relatively little risk. However, the funds are highly susceptible to changes in interest rates. As a result, a declining interest-rate regime is an excellent time to invest in gilt funds as their NAV rises.
Benefits of Gilt Funds
- As the money is invested in government securities, there is no credit risk with gilt mutual funds.
- With gilt funds, your capital is nearly fully protected.
- Compared to other investment alternatives, some of the best-gilt funds provide reasonable returns even with a short to the medium-term investment horizon. Moreover, this is a fantastic alternative for risk-averse investors due to the low risk.
- Gilt funds, as opposed to corporate bond funds, are more liquid instruments since they do not carry credit risk.
- Gilt funds are an excellent alternative for creating wealth over the medium to long term. In addition, long-term investment in gilt funds allows you to navigate interest rate volatility effortlessly.
Debt and gilt funds are good choices for those with limited risk-taking ability. The funds provide long-term rewards to investors while carrying negligible risk. Although both debt and gilt funds offer advantages, it is vital to monitor interest rate movements when investing in gilt funds due to their acute sensitivity to them.
