When it comes to parking money in debt-oriented instruments, two fund categories often come up in conversations: gilt funds and liquid funds. While both are considered relatively lower risk compared to equity funds, they serve very different purposes within a portfolio.
If you have ever thought which of these fits your investment style or financial goals better, it is worth breaking down how they work, where they differ, and what kind of investors they suit. Let us explore everything in this blog.
What Are Gilt Funds?
Gilt funds are mutual funds that invest primarily in government securities (G-secs) issued by the central and state governments. These are long-term debt instruments, and the key appeal here is credit safety. Since they are backed by the government, the risk of default is extremely low.
However, gilt funds are not entirely risk-free. Their biggest sensitivity lies in interest rate movements. When interest rates fall, gilt fund prices rise (because older bonds with higher yields become more valuable), and when rates rise, their prices can drop. This is called interest rate risk.
Because of this, gilt funds are more suited for investors who have a longer investment horizon (usually 5+ years) and are comfortable with short-term fluctuations in chasing stable long-term returns.
What Are Liquid Funds?
Liquid funds, on the other hand, invest in very short-term debt instruments like treasury bills, commercial papers, and certificates of deposit, usually with maturities of up to 91 days.
Their primary objective is capital preservation with quick liquidity. They tend to deliver moderate but steady returns and are much less affected by interest rate fluctuations compared to gilt funds.
Investors often use liquid funds to park surplus cash for the short term. For example: emergency funds, money temporarily lying idle between investments, or funds earmarked for near-term expenses.
Key Differences Between Gilt and Liquid Funds
Let’s break down the major differences that matter when deciding where to allocate your money:
- Risk and Volatility: Gilt funds carry higher interest rate risk and can show noticeable NAV fluctuations, especially in volatile rate cycles. Liquid funds carry minimal volatility, making them more predictable for short-term use.
- Investment Horizon: Gilt funds work best for a long-term horizon (5–10 years) to ride out rate cycles. Liquid funds are ideal for short-term horizons (a few days to a few months).
- Returns Potential: Gilt funds can offer competitive returns during falling interest rate periods. Liquid funds offer modest but stable returns regardless of interest rate changes.
- Credit Risk: Gilt funds have virtually zero credit risk since they hold sovereign-backed securities. Liquid funds invest in high-quality short-term instruments, but there is minor credit risk, although defaults are rare.
Which One Fits Your Portfolio Better?
The choice depends largely on your financial goals and investment time frame:
- If you want to build a low-risk long-term component in your portfolio and can tolerate interim ups and downs, gilt funds can serve as a stability anchor while also benefiting from interest rate cycles.
- If you want to safely park money short-term and have quick access to it without worrying about market fluctuations, liquid funds are better.
A practical approach for many investors is to use both.
Final Thoughts
Both gilt and liquid funds are technically debt funds, but their purpose and behavior within a portfolio are quite distinct.
Gilt funds suit investors seeking stability over the long term, while liquid funds suit those who are on the lookout for safety and accessibility in the short term. Instead of treating them as either/or options, think of them as tools for different jobs.
