Given their inherent government backing, gilt funds have low default risk but have considerable interest-rate risk. These funds typically invest in government securities of medium to long duration, which are overly sensitive to interest rate changes. If interest rates fall, their prices rise sharply, and gilt funds appreciate. However, these funds are the most vulnerable in a rising rate environment. Thus, they can be fairly volatile, and it is something that one should be careful about.
As a principle, gilt funds are suitable for a small and tactical allocation for those who can time their entry and exit in a falling rate scenario, but we are not at that stage right now.
At Value Research, we prefer high-quality short-duration funds for investors' core fixed-income portfolios, given their relatively stable returns, reasonable flexibility to invest across different debt securities, and predictable maturity structure. So, for a steady-state fixed-income allocation, they are worth considering.
Suggested read: A simple plan for a post-retirement income