What are Gilt Funds? Know in Detail

Gilt funds are essentially investments in government securities in the form of debt funds. The name comes from the gilded-edge certificates that used to be issued for government bonds. According to Sebi’s regulations, gilt funds are supposed to make an investment of at least 80% of their total assets in fixed-interest generating government securities. These investments go towards funding infrastructure projects introduced by the Central and State government or other such expenses. Read on to find out what the gilt fund meaning is as well as the basics of gilt funds in India.

What are the types of gilt funds and how do they work?

The two types of gilt funds in India are as follows:

  • Ine type consists of funds that invest in government securities across different maturities.
  • The other type includes funds that have a constant maturity of ten years. These have to invest a minimum of 80% of their total assets in securities with a 10 year maturity period.

As for how gilt funds work, the Government of India approaches the Reserve Bank of India (RBI) when it is in need of funds. Not only is the RBI the central banking institution in India, but it is also the government’s banker. Thus the RBI borrows capital from other financial entities like banks or insurance companies and lends it to the government. The RBI issues fixed-tenure government securities in exchange for the funds that have been loaned to the government. These are the government securities that fund managers of gilt funds then subscribe to.

On reaching maturity, the government securities are returned by the gilt fund in exchange for money. For investors, the appeal of gilt funds lies in the potential for decent returns and relatively low level of risk. However, note that the performance of gilt funds relies heavily on interest rate movements, which is why it is ideal to invest in gilt funds at a time when interest rates are on the decline.

What are the benefits of investing in a gilt fund?

Gilt funds are considered a reliable investment option for risk-averse investors looking to get moderate returns. If you are considering investing in gilt funds, here are a few benefits to keep in mind:

Access to government securities:

Retail investors typically do not get direct exposure to certain government securities; with gilt funds anyone wishing to invest can get access to government instruments.

Low credit risk:

Government securities carry little to no credit risk since the government is a trusted issuer and is known to follow through on its obligations, thus making it a minimal risk investment in that aspect.

Good returns:

Gilt funds generally give reasonable returns at low risk and are a suitable option for investors with short-term or medium-term investment goals and plans.

Factors to consider before investing:

While this may seem like a lucrative option for many, it is essential to consider all the relevant factors before committing to a gilt fund:

Risks involved:

As opposed to corporate bonds, gilt funds do not come with credit risk and are the most liquid financial instrument. However, gilt funds do carry interest rate risks. When interest rates are on the increase, the net asset value (NAV) of gilt funds tends to plummet sharply.


Despite the ability to generate considerable returns, even going up to 12%, gilt fund returns are not guaranteed and may vary depending on the interest rate regime. Hence, investors are advised to invest during decreasing interest rate regimes. Moreover, the expectation is that gilt funds still deliver returns higher than those of equity funds even when the economy is in a slump.


Gilt funds charge an expense ratio, which is an annual fee that includes associated expenses and the fund manager’s fees. This forms a percentage of the average asset under the management of the fund. According to Sebi regulations, the upper limit of debt funds’ expense ratio stands at 2.25%, but the operating costs vary according to the fund manager’s strategy.

Maturity period:

If you are contemplating investing in gilt funds, your investment horizon should be somewhere around 3-5 years at the very least, as a gilt fund portfolio’s average maturity is around that same duration.

Investment Goals:

If your goals are medium-term, you can invest in gilt funds and see how the volatility of interest rates can work in your favour. If you are looking for short-term wealth accumulation, in a time where markets are on the decline, you can opt for the relatively safe gilt funds.


The gains from your investment are subject to taxation, the rate of which depends on your holding period i.e: investment tenure. Gains made during a period of under 3 years are short-term capital gains (STCG). Gains made during a period that exceeds three years are long-term capital gains (LTCG). Investors are expected to pay the income tax once they have received the STCG from their gilt fund, and the tax rate for LTCG is 20% flat, alongside indexation benefits.

Here’s what you need to keep in mind :

  • While selecting a gilt fund, make sure to assess your options according to the various parameters involved; know your goals, investment horizons, and risk appetite well.
  • The default risk for gilt funds may be zero, but the interest rate risk is very high. The government security with a 10-year maturity is considered the benchmark, and it sets the tone in the bonds market. Traders compare the difference in interest rates between corporate and government bonds, and the 10-year maturity bond and other government securities.
  • Mutual fund managers generally don’t recommend gilt funds as an option as they may believe that only investors with sufficient knowledge and awareness of the markets will be able to invest in these funds, as they are highly dependent on the movements of interest rates.
  • Go for gilt funds only if you are sure of your ability to track interest rate fluctuations, and can time your entry and exit well.

To Sum It Up

Government securities such as gilt funds display an inverse relationship between their yields and their price, and the movements change according to the RBI’s instructions. Falling interest rates are positive for gilt funds since the NAV of such schemes also rises in sync with the prices. Hence, since the RBI began reducing rates, gilt funds have been performing very well over the course of the past year or so. Gilt funds can be a tricky investment for some – make sure that you research your options thoroughly and compare them before finalizing a fund, or consult a broker before investing in a scheme.