Are Gilt Funds Safe?

Are there any risks involved with investing in a government security fund? They have to be quite safe given that they invest only in government securities
-Mahesh Kapur

Government securities (also known as gilts), come with the backing of the government as far as principal and interest payment is concerned. Therefore, they do not carry any credit risk. But they do suffer from what is called interest rate risk. A rise in the interest rates leads to a decline in the prices of bonds, and it is generally sharpest in case of gilts. This, in turn, impacts the NAVs of gilt funds. Moreover, the longer the tenure of the security, the harder it is likely to be hit by an increase in interest rates.

This article was originally published on November 08, 2006.