7 Mins

Gilt funds are debt instruments that invest primarily in securities issued by Central and State Governments. They fall into the category that gives moderate returns and ensure safety

Gilt Funds
Gilt Funds

What are gilt funds?

In India Gilt Funds are investment schemes that invest in Government Securities. The Reserve Bank of India (RBI) on behalf of the government issues these securities. These securities have varying maturities – medium to long term. Since gilt mutual funds’ investments are made to the government, they are considered to be safe. The RBI determines the interest for these securities, making them low-risk investment options

Long term maturity schemes have high volatility, which means they can be bought and sold quickly because their default risk is almost nil. These funds do not have a risk of non-payment of principal or interest amount. However, there is a higher exposure to interest rate risk. 

In the short term, they are considered to be the riskiest among all the debt funds. Gilt funds’ investments are highly vulnerable to interest rate risk. In a falling interest rate scenario, these funds can offer high returns. 

It enable investors to invest in government securities. Otherwise, investing in them would require a vast sum. Investors can diversify by investing in it. These funds earn reasonable returns and help in wealth accumulation over the medium to long term. 

How do Gilt Mutual Funds work and how safe are they?

When a State or Central Government requires funds, they approach the RBI. RBI then accumulates funds from insurance companies or banks and lends it to the government. In exchange, RBI issues Government securities for a fixed tenure. Gilt funds subscribe to these securities. The fund returns it once the security matures, and receives a pay out.

These funds generate returns through interest rate risk. Since the government backs it, the credit risk is almost zero. Interest rates and prices of government securities are inversely related. In other words, when interest rates rise, prices of government securities fall. It has a direct impact on its performance.

What securities do gilt funds invest?

In India Gilt funds invest in securities issued by the government of varying maturities. There are two types of mutual funds in India:

  • Long term gilt funds: This is a long duration fund. These invest in long-dated government securities or bonds. The maturity period is higher than five years and up to even 30 years. Long term gilt funds are riskier and volatile, as they are more sensitive to interest changes. These best suit the institutional investors. 
  • Short term gilt funds: This is a short duration fund. These invest in short term government bonds and long term bonds with short term residual maturities.

Who can invest in Gilt Funds?

It best suit investors who seek the safety of their investments rather than high returns. 

It offer moderate returns and ensure capital preservation. In comparison to an equity fund, it offer better asset quality. In a falling market scenario, these are effective. The interest rate volatility offers high returns but also exposes the fund to interest rate risk.

Factors to consider as an investor

  • Risks: These are most liquid schemes and do not have any credit risk as the government backs these. However, there is an exposure to interest rate risk. During a rising interest rate regime, its NAV drops sharply. 
  • Returns: It has a history of earning  relatively high returns . It does not guarantee returns. Returns vary based on the interest rates announced by the RBI. In a falling interest scenario, these funds generate high returns. 
  • Investment Horizon: Government issues securities for a medium to long term maturity periods. These fund have an average maturity of three to five years.  
  • Investment Planning and Financial Goals: If the investment objective is to accumulate stable returns with no credit risk, gilt funds are the best available schemes. In a falling market scenario, they are the safest and right choice to earn good short term returns. 
  • Expense Ratio: Similar to any mutual fund, it also charges management fee, and other related expenses. SEBI has capped the expense ratio at 2.25% for debt mutual funds to protect the interest of investors. The operating cost is fund specific and depends on the fund manager’s investment strategy. Hence an investor must consider the expense ratio while performing investment planning and setting goals.
  • Tax: Taxation of gilt funds is similar to that of debt mutual funds. Capital gains depends on the investment duration. STCG tax would be applied according to the investor’s income tax slab if it were redeemed before three years. Moreover, for long term investments beyond three years, long term capital gains apply at 20% with indexation.


Gilt funds primarily have these benefits when compared to other investment avenues.

  1. No credit risk: Since these funds invest in securities that are of high credit quality, there is more or less a guarantee of protection.
  2. Easy access to government investments: Investing in government securities is beyond reach for retail investors. They need large sums of money. Gilt funds allow retail investors to invest in such securities.
  3. Moderate returns: Gilt funds give moderate risk-free returns in medium to long term. It gives investors a pretty good bargain by balancing risk and return.


Gilt funds have their own set of risks as well.

  1. Increasing interest rate regime: Under an increasing interest rate regime, the returns from gilt funds fall. The inverse relationship between bond prices and interest rates affects the returns of gilt funds.
  2. Low on liquidity: They invest in government securities, though they are safe investment options, they are not as liquid as the other securities in the market. It will be difficult for funds managers to switch between government securities.


Gilt funds also charge a managing fee namely expense ratio. The expense ratio for all debt funds is capped at 2.25% on NAV by SEBI. The fund manager cannot charge more than this from investors. The investors have to be careful while choosing funds.


Like other mutual funds, its taxation depends on the holding period of the investment. Investments redeemed before 36 months is qualified for STCG, and investors are taxed at their slab rates. If redeemed after 36 months, then the investors are taxed at 20% after indexation benefits. 


2019 was a favorable year for gilt funds in India due to the falling interest rate regime. This explains the double-digit returns from these mutual funds in India. However, interest rate movements are not unidirectional. There are chances of negative returns as they are highly volatile. Investors have to proceed with caution as the interest rate cuts are not expected soon .

Frequently Asked Questions

What is the difference between gilt and debt funds?

Gilt funds are mutual funds that invest in government securities. The tenure of these funds is between medium to long term. They best suit investors who prefer getting predictable returns. These are low-risk investments as the underlying securities are government securities, and the returns from these are guaranteed.

Debt funds are mutual funds that invest in corporate bonds, government bonds, money market securities, and other debt securities. The tenure for these funds is between 7 days to 5 years. Hence the suit investors with short term, medium-term and long term investment horizon. They are low-risk investments as their returns do not directly depend on the market. The returns are in the form of interest and hence are mostly predictable.

Which is a good time to buy gilt funds?

Gilt funds invest in government securities with a medium to long term horizon. Hence these funds are prone to interest rate risk. When interest rates fall, the NAV rises, and when interest rates rise, the NAV of these funds fall. This leads to the yields becoming negative in the short run. Hence the best time to invest in gilt funds is when inflation is at its peak and RBI is not likely to increase interest rates in the near future.

Falling interest rates regime is the best time when one can invest in these funds. Falling interest rates will lead to an increase in the NAV of the fund, leading to growth in short term yields.