Those who are new to mutual fund investing often confuse them with equity funds. There is a common misconception among vast audiences that all mutual funds are equity funds, or they feel that all mutual funds invest in stocks. This is not entirely true. Yes mutual funds do invest in stocks and equity related instruments, but there are other mutual funds as well that invest in money market instruments are debt bonds, corporate securities, treasury bills, etc.

Where a mutual fund will invest will totally depend on the nature of the scheme and the risk profile that it carries. Mutual funds are further categorized by so that investors are able to take an informed investment decision without getting confused. This categorization happens based on certain aspects like size of the fund, asset allocation, and risk profile that funds carry, etc.

While equity funds are the most talked about mutual funds among larger audiences, there are other mutual fund categories like debt funds that need some attention to. That’s because debt funds are lot less risky as compared to debt funds and the returns from these funds do not entirely depend on market movements.

What are guilt funds?

When the Indian government is in need of capital, it seeks help of the Reserve Bank of India (RBI). The RBI in turn, reaches out to insurance companies and banks to pool in the funds, loans it from them and then lends it to the Indian government. In exchange, the Government of India issues certain fixed income securities. A fund house running a guild fund usually invests in such securities.

Gilt funds are categorized as debt mutual funds by SEBI (Securities and Exchange Board of India). While equity mutual funds invest heavily in equity and equity related instruments, debt funds invest majorly in fixed income securities. Guilt funds are those mutual funds that invest in high rated (AAA+) fixed income securities like central and state government bonds.

Should retail investors bother to invest in gilt funds?

On completion of the tenure, a gilt fund returns the securities to the government in exchange for some capital. So the performance of a gilt fund is highly dependent on the fluctuation in the interest rate of those securities. This means that when the interest rates are on the down side, it is the correct time to invest in gilt funds.

However, before taking any investment decision, investors are expected to determine their ultimate financial goal. It not only helps them in making an informed investment decision, but investors are able to align their investments accordingly. Gilt funds are supposed to carry moderate to low investment risk and hence someone with a moderate to low risk appetite who doesn’t wish to expose their finances to the vagaries of equity markets may consider investing in gilt funds.

If you are someone with a long term investment horizon you might want to consider investing in other types of mutual funds. That’s because gilt funds are generally better off with those investors who have an investment horizon of three to five years. Also, the returns provided by gilt funds are relatively lower, and if you are someone with risk appetite seeking aggressive investment approach, you may opt for equity mutual funds instead.

You can always add mutual funds to your portfolio to give your financial planning some diversification. But if you are entirely new financial planning or mutual fund investing in general and lack knowledge about the financial markets and how they function, you can still consider investing in mutual funds. That’s because mutual funds offer diversification and active risk management at the same time.

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