However, before taking an investment decision, you should also know the pros and cons of the gilts funds. The gilt funds do not offer assured returns and hence, performance can vary significantly from fund to fund. Therefore, it makes sense to seek the advice of an investment expert who works for a wide variety of funds.

The advantage: Gilt funds carry zero per cent default risk as they invest only in government securities. The other key feature of these funds is immense liquidity. These funds are open-end schemes which enable you to come in and go out at any time you want. The funds can be operated like a bank account in which you can add more amount, withdraw partially for fully as per your needs and returns are almost 2-2.5 times more than that of a saving account. The gilt funds also offer regular returns. Most of the them have an option where you can opt for quarterly returns. The funds also offer dividends which are now tax-free at the hands of investors. Thus, investors can get a tax-free return of 9.5-11 per cent.

The disadvantage: Gilt funds are free of credit risk but not price risk. Prices of gilt instruments are highly volatile depending upon the interest rates prevailing in the market and how the interest rates are expected to move in the future. Now, in case the interest rates fall, the prices of the instrument go up and the NAV of your funds will rise but vice-versa if the interest rates rises. But this risk can be covered by holding the instruments till their actual maturity. Gilt funds are beneficial for high tax payers.

The author is director of Bajaj Capital Ltd