What are Gilt Funds

What are Gilt Funds

Gilt funds are those mutual funds which invest their money into government securities or guilt securities. Government issue securities to finance their excess expenditure over the income. Most of the time you will find government doing a lot of expenditure. When its expenditure exceeds its income, it requires funding to maintain the gap. So they issue securities to the public and these securities normally used for longer duration and carries a fixed rate of interest on its face value which is also known as coupon rate of interest.

Why do Government Securities are called Gilt Securities

Its back to the periods when the British government used to issue bonds and these bonds were in the physical form issued on papers which had gilt edges. That is why Government securities are known as gilt securities. Basically, Gilt refers to a thin gold plate or thin gold leaf or gold plate and the British government used to have on the bonds which are in physical form with some gold edges. Therefore, the popularly start recognizing as Gilt securities. As these bonds are issued by government securities, they are fully secured and tends to trustworthiness like gold and thus they are called Gilt securities and the mutual funds which invest in such securities are known as Gilt mutual funds.

Risk attached to Gilt Funds

Whenever Gilt Funds invest in government securities, there are basically two risks involved: Credit Risk and Interest Rate Risk.

Credit Risk refers to default risk and in the case of Gilt funds, this type of risk is almost zero. Since the amount has been invested in government securities there is no risk of default. Coming to Interest Rate Risk, the risk is high because Government securities are issued for longer duration and their market price fluctuate with the change in the rate of interest resulting in a change in NAV of Gilt Fund.