What is the difference between a liquid fund and a gilt fund?

Difference Between Liquid Funds and Gilt Funds

Investment Type:

• Liquid Funds: Invest in short-term debt instruments like Treasury Bills, Commercial Papers, and Certificates of Deposit.

• Gilt Funds: Invest only in government securities (G-Secs) with varying maturities.

Maturity Period:

• Liquid Funds: Instruments mature within 91 days.

• Gilt Funds: Maturity can range from 1 year to 40 years.

Risk Level:

• Liquid Funds: Low risk due to short-term investments.

• Gilt Funds: Higher risk due to long-term bond price fluctuations.

Interest Rate Sensitivity:

• Liquid Funds: Low impact of interest rate changes.

• Gilt Funds: High sensitivity-bond prices rise when interest rates fall and vice versa.

Returns:

• Liquid Funds: Stable but lower returns.

• Gilt Funds: Potentially higher returns but more volatile.

Liquidity:

• Liquid Funds: Highly liquid, redemption processed in T+1 day.

• Gilt Funds: Moderate liquidity, redemption in T+1 or T+2 day

Taxation:

• Both are taxed as per the income tax slab (as per new tax rules from April 1, 2023).

Best For:

• Liquid Funds: Ideal for parking short-term funds or an emergency corpus.

• Gilt Funds: Suitable for long-term investors who can handle interest rate fluctuations.

What is the SBI gilt fund?

SBI Gilt Fund is a mutual fund that invests exclusively in government securities (G-Secs) issued by the Reserve Bank of India (RBI). These securities are backed by the government and carry zero credit risk. It makes them a safe investment option for long-term investors.

Is a gilt fund better than an FD?

It depends on your goal:

• Choose Gilt Fund if you want higher potential returns over the long term and can handle market fluctuations.

• Choose Fixed Deposit (FD) if you want stable and guaranteed returns without any risk.

Gilt funds can give better returns than FDs when interest rates fall, but they can also fluctuate. FDs, on the other hand, provide fixed, risk-free returns but may offer lower returns than gilt funds over time.

What are the disadvantages of gilt funds?

Although gilt funds provide safety of capital, they are not entirely risk-free.

Interest rate risk: These are highly sensitive to interest rate changes.

No guarantee of returns: While there is safety of your capital, but doesn't guarantee fixed returns.

Need long-term holding: to benefit from interest rate cycles.

Is it a good time to buy gilt funds?

Investing in gilt funds can be advantageous when interest rates are expected to decline, as bond prices typically rise in such scenarios, leading to potential capital gains.

As of early April 2025, several indicators suggest a favourable environment for investing in gilt funds:

• Anticipated rate cuts

• Inflation cooling down

• Foreign investment in bonds

However, please consider these factors before investing:

• Interest rate risk

• Investment horizon

• Tax implications

Please consult a financial advisor before investing.

Should I invest in gilt funds?

You can invest in gilt funds if:

• You have a long-term horizon (3-5+ years).

• You understand interest rate movements and are willing to take some volatility.

• You want a credit-risk-free investment with the potential for higher returns than FDs.

Who should buy gilt funds?

Someone who is a:

• Long-term investor with a 3-5 year horizon.

• A risk-averse investor who understands interest rate fluctuations.

• Seeking alternatives to FDs.