Gilt Funds vs. Corporate Bond Funds: A Comparison

Post Date : March 11, 2025

Gilt Funds vs. Corporate Bond Funds: A Comparison

Disclaimer: Investments in the securities market are subject to market risks. This content is for educational purposes only and does not constitute financial advice.

What are Gilt Funds?

Gilt funds are mutual funds that primarily invest in government securities (G-Secs). These securities are debt instruments issued by the Central Government or State Governments to raise funds for public expenditure. Since they come with a sovereign guarantee, gilt funds carry no default risk and hold a high credit rating.

The issuance of G-Secs is facilitated through the Reserve Bank of India (RBI). The term “gilt” signifies their safety and reliability, making them a preferred choice for conservative investors.

Types of Gilt Funds

1. Gilt Fund

Gilt funds actively invest in government securities with varying maturities. These may include short-duration securities (1-3 years) or long-term papers with maturities ranging from 10 to 15 years.

As per SEBI regulations, at least 80% of a gilt fund’s portfolio must be allocated to government securities. The remaining 20% is typically invested in Treasury bills (T-bills), cash-equivalent securities, certificates of deposit, and commercial papers.

2. Gilt Fund with 10-Year Constant Maturity

This category maintains exposure to government securities with fixed 10-year maturities, as mandated by SEBI. Like standard gilt funds, at least 80% of the portfolio is allocated to government securities.

Features of Gilt Funds

1. Investment in Government Securities – Gilt funds primarily invest in central and state government bonds, making them one of the safest investment options.
2. Low Credit Risk – Since the government backs these funds, the risk of default is minimal.
3. Stable Returns – Gilt funds provide stable returns over time, but they are subject to interest rate movements.

What are Corporate Bond Funds?

Corporate bond funds are mutual funds that invest at least 80% of their financial assets in corporate bonds. Businesses issue these bonds to raise capital for operations, expansion, and short-term expenses such as advertising, insurance, and working capital.

Types of Corporate Bond Funds

Corporate bond funds primarily invest in:

1. Highly Rated Companies (AA+ or above) – These include bonds issued by large, stable corporations, public sector undertakings (PSUs), and Navratna firms.
2. Lower-Rated Corporate Bonds – These bonds offer higher potential returns but come with increased risk.

Features of Corporate Bond Funds

1. Investment in Corporate Bonds – These funds invest in corporate debt instruments, which generate periodic interest income.
2. Potentially Higher Returns – Since corporations, unlike governments, can default, investors assume a slightly higher risk in exchange for better returns.
3. High Liquidity – Corporate bond funds offer better liquidity compared to individual corporate bonds, making them easier to trade.

Gilt Funds vs. Corporate Bond Funds

The following table highlights the key differences between these two fund types:

Gilt Funds or Corporate Bond Funds – What to Choose?

1. Risk Tolerance

If you have a low-risk tolerance, gilt funds are a safer option, as they are backed by the government. Corporate bond funds, on the other hand, are better suited for investors willing to take moderate risk in exchange for higher potential returns.

2. Investment Horizon

• Gilt funds are ideal for long-term investors seeking stability and consistent returns.
• Corporate bond funds are suitable for medium to long-term investors looking to balance income generation with capital appreciation.

3. Return Expectations

• Gilt funds offer lower but stable returns, making them suitable for capital preservation.
• Corporate bond funds may offer higher returns, but they come with increased credit risk.

4. Market Conditions

Gilt funds perform well during a falling interest rate environment, as bond prices rise when rates decline. Corporate bond funds perform well when the economy is growing, leading to stronger corporate performance and reduced default risks.

FAQs on Gilt Funds vs. Corporate Bond Funds

1. What is the Best Time to Invest in Gilt Funds?

The best time to invest in gilt funds is during a falling interest rate regime. As interest rates decline, the prices of government securities rise, leading to higher fund returns.

2. Are Gilt Funds Safe?

Yes, gilt funds are highly safe since they invest exclusively in government securities, eliminating credit risk.

3. Who Should Invest in Corporate Bond Funds?

Corporate bond funds are ideal for moderately high-risk investors with an investment horizon of 2-3 years.

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