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What Are Gilt Mutual Funds and Their Benefits

Investing in gilt mutual funds can be profitable with in-depth knowledge of stability and interest rate sensitivity. This article will cover various types of gilt fund schemes, analyse their performance trends, and provide insights into the appropriate entry timing. 

What is Gilt fund in mutual fund?

Gilt funds are low-risk debt mutual funds that invest exclusively in government-backed bonds and fixed-income securities. These funds invest in securities with varying maturation dates and construct portfolios based on market conditions and interest rates. Gilt funds offer minimal risk of default compared to corporate bonds or bank instruments but are vulnerable to interest rate fluctuations. 

The gilt full form in mutual fund terminology for gilt funds stands for “Government Investment Trust”. These funds put money into government securities that have varying maturation dates, meaning the periods differ for when the investments must be paid back.

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

There are two primary types of gilt fund schemes of mutual funds available in India:

  • There are investment funds that put money into government bonds with different timeframes for when they need to be paid back.
  • Funds that specifically invest 80% or more of assets in 10-year maturity government securities

When the government needs money, it approaches the Reserve Bank of India (RBI), the government’s banker. The RBI borrows from banks and financial companies and then lends capital to the government, issuing fixed-tenure government securities in return. Gilt fund managers subscribe to these securities. 

Upon maturity, the funds return the government securities in exchange for their investment plus interest earnings. For investors, appeal lies in gilt funds’ prospect for reasonable returns coupled with relatively low risk. However, performance depends heavily on interest rate movements, making declining rate environments ideal times to invest in these funds.

What are the benefits of investing in a Gilt fund?

Gilt funds provide a relatively low-risk way for risk-averse investors to earn moderate returns on government securities. Benefits include:

  • Access to Government Securities – Individual investors usually don’t have the option to invest in certain government securities directly. However, through “gilt funds,” they can have the opportunity to invest in these securities and benefit from them. This helps to make investing in government securities more accessible to everyone.
  • Low Credit Risk – Gilt funds are considered low-risk because securities have minimal credit risk, given that the government is known for reliably honouring its obligations. This provides investors with a sense of security and assurance.
  • Good Returns – Investors who are looking for low-risk options and want to invest for a short or medium-term period usually find gilt funds to be a good choice. These funds offer reasonable returns and can be a great investment option for those who need to become more familiar with technical details.

Factors to consider before investing

Before making a decision, it’s important to consider these factors.

1. Risks – Investing in gilt or government bond funds may come with some risks. When interest rates go up, these funds may lose value, which means you may get back less than what you invested.

2. Returns – Please note that the returns you may receive on your investments are not guaranteed and can fluctuate depending on the changes in interest rates. It’s important to keep in mind that periods of decreasing interest rates may result in higher returns.

3. Fees – Investment fees can be around 2% per year, which includes the expenses for running the investment. The exact cost may vary depending on the investment approach.

4. Investment Goals – Investors with goals that are a few years away can benefit from choosing investments that take 3-5 years to mature. For those who seek short-term investments, there are strategies to mitigate market volatility.

5. Taxation – If you make profits by selling investments within 3 years of buying them, you will have to pay tax on those profits at the same rate as your income tax. However, if you sell your investments after 3 years, you will be taxed at a lower rate of 20%, and you may also get some benefits to adjust the tax rate for inflation.

Step-by-step guide on investing in Gilt mutual funds 

To select the right gilt fund, research and plan carefully. Gilt funds offer stability during volatility but require skilful tracking due to their reliance on interest rate movements.

Follow this 7-step process when considering adding gilt schemes to your portfolio:

Step 1) Assess your risk appetite and goals

With their sharp sensitivity to rate shifts, gilt funds suit investors comfortable with some volatility in exchange for reasonable returns. Those seeking a rock-solid guarantee of capital better suit other fixed-income options. 

Also, examine your financial timeline and objectives. Gilt funds often align to medium-duration goals of 3-5 years, where investors can ride shorter-term fluctuations. Their average maturity hovers in the same range. 

Step 2) Understand the types of Gilt funds

  • Maturity Variants – These invest across government securities of different maturities based on market conditions. Provides diverse exposure.
  • 10-Year Constant Maturity Funds – At least 80% of their total assets must comprise 10-year government bonds. Concentrated duration risk but predictability.

Study interest rate movements over the previous 5-10 years. Have rates largely risen, declined, or fluctuated? How severely did funds respond? 

Compare returns of specific maturities and managers under rate shifts. This informs on expected volatility and potential earnings in the future based on projections.

Step 4) Expense ratios and taxation

As fixed-income schemes, gilt funds levy expense ratios under 2.25% toward operating fees. Compare costs across providers.

Also, factor tax rates based on short vs. long-term capital gains. Under 3-year holding periods, see income tax rates, while over 3 years, pay a flat 20% on gains.

Step 5) Shortlist specific provider options

Screen funds with strong historical returns relative to benchmarks. 

Seek experienced managers to be successfully able to limit downside during rising rate regimes through nimble rebalancing. 

Confirm investment minimums work for you. Some require high initial investments that prohibit smaller retail participants. 

Step 6) Time your entry

Ideally, invest when interest rates enter downward trajectories so funds can capture gains as yields fall. This lifted past returns significantly versus entering stagnant or rising rate environments. 

Step 7) Rebalance as interest rate outlook shifts

Track interest rate movements regularly. Reduce gilt fund exposure if rates rise to avoid losses. Buy more if rates fall. 


Skilful tracking of rate shifts allows gilt fund investors to harness fluctuations for reasonable returns. While requiring research and watchfulness, aligning selections to the timeline and risk tolerance unlocks their role in delivering stability during volatility. 


 What are gilt funds?

Gilt funds are mutual funds that invest in government-backed bonds and fixed-income securities in India.

Why are gilt funds considered low risk?

Gilt funds carry minimal risk of default since they loan money to the government. However, they do face high-interest rate risk.

How do gilt funds earn returns?

Gilt funds earn interest from the government against the securities investments they make. Capital gains can also be earned if fund prices rise due to falling interest rates.

 Who should invest in gilt funds?

Gilt funds suit medium-term investors comfortable with some volatility in exchange for reasonable returns of 8-10% historically. Strictly risk-averse investors may prefer other fixed income. 

How do changes in interest rates impact gilt funds?

Rising interest rates lower existing bond prices and gilt fund NAVs. Falling rates raise bond values and gilt fund returns.

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