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Gilt Funds

Undoubtedly, there are numerous investment options. Moreover, it confuses many investors as they lack the insights. Portfolio diversification helps in building a strong portfolio. Investing in different asset classes is key and Gilt funds are one of them. In this analysis, we discuss the same.

What is Gilt Fund?

It is a mutual fund that invests only in government securities (g-secs). They have different maturity tenors. Government backing makes it risk-free. RBI determines the interest rates and thus considered safe.

Furthermore, gilt funds are a type of debt funds. Gilded edge certificates are also known as gilt. As per SEBI regulations, these funds have to mandatorily invest 80% of their assets in government securities.


  • Firstly, those which invest mostly in government securities with different maturities.
  • Secondly, those which invest 80% of their assets in g-secs with a maturity of 10 years.

How do gilt funds work?

Suppose, the Central or State governments require funds. It asks the banking regulator RBI (Reserve Bank of India). RBI is also the Government’s banker. RBI consequently secures the required money from banks and insurance organizations by issuing them g-secs with a fixed maturity. Gilt funds subscribe to such securities. Upon maturity, the fund returns it and receives the payment.


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Who should invest in gilt funds and why?

In comparison to Bond funds which can invest in corporate bonds, Gilt funds invest in only government securities. This feature makes it a low-risk investment. The returns on these funds are stable and offer capital preservation. In conclusion, they are a good option for investors with a low-risk appetite and wanting to explore government securities.

Risk involved:

1. Increasing interest rate regime: The rate of returns for these funds falls when the rate of interest rises. There is an inverse relationship between bond prices and interest rates, which affects the returns.

2. Low on liquidity: Since these funds invest in government securities, they have a low liquidy as the other securities in the market.


1. Zero Credit Risk: Since most of the mutual funds invest in corporate bonds, there is credit risk involved. Whereas, gilt funds have no credit risk because the government most often fulfill their obligations. Whereas in the case of corporate bonds, chances of defaults are there.

2. Capital Protection: Clearly, no mutual fund offers 100% capital assurance. Gilt funds are amongst the few funds that have minimal risk. Investments are made only in government-backed securities, and the chances of any capital loss are almost nill.

3. Invest in Securities Not Available to Retail Investors: Generally, government-backed securities are unavailable to retail investors. But institutional investors such as a fund house can purchase such securities. Therefore, with the help of gilt funds, you get the chance to invest in government securities indirectly.

4. Reasonable Returns: As compared to other investment options, gilt funds provided decent returns even if you are investing for the short or medium term. If you consider the minimum risk, this is an excellent investment option for risk-averse investors.

Gilt Funds

Things to consider before investing

1. Different from other MF’s: Gilt funds invest in Central and state government G-secs. They earn a fixed interest rate in addition to this. Upon maturity, these funds return the securities and receive a pay-out. Owing to backing from the government, they are risk-free.

2. Great record but need to be cautious: The returns over the past 10 years have been phenomenal. Moreover, the returns over the 2 year period are even better at 14%. They clearly score higher than FD’s. However, it is highly volatile and subject to interest rate changes. Investors must factor in these points before investing.

3. Investment duration: Gilt funds have a long-term investment outlook. They have a maturity of over 7 years. Investors must keep in mind their financial objectives before adding this into their portfolio.

4. Cost: Gilt funds consequently charge an annual fee comprising of the fund manager’s fee and miscellaneous expenses. The upper limit on expense ratio is 2.25% of the assets under management. An investor should calculate the impact such an expense will have on the returns.

5. Taxation: Gilt funds are fully taxable. However, the capital gains on these funds for 36 month holding period is taxed as per individual slabs. But, if it is held for a longer period it is taxed at 20%.

6. Investor types: These are suited for low-risk appetite investors. Furthermore, investors with technical knowledge and insights on interest rate movements can go for this.

Gilt Funds

Top 5 Gilt Funds in India

Gilt FundAUM
(in cr)
Returns over
Returns over
SBI Magnum
Gilt Fund
243715.66% 9.34%
1,27111.97% 10.27%
ICICI Prudential
Gilt Fund
1,13812.30% 10.53%
Reliance Gilt
Securities Fund
DSP Govt
Sec Fund


Gilt funds are a type of mutual funds that generally invest only in government securities (g-secs). Furthermore, as Central or State governments need money, they ask the Reserve Bank of India. Certainly, RBI is the banker to the government. Therefore, RBI issues securities with different maturities and collects money from banks and insurance organizations. These funds subscribe to such securities and upon maturity, the funds return the securities and get a pay-out.

The gilt fund lock-in period is generally 7 years. An investor cannot withdraw his money before this time. Though gilt fund risk is negligible, they are subject to changes in interest rates. Subsequently, these funds are an attractive investment option as they offer portfolio diversification.

The taxation of this gilt is subject to a holding period. If it is held up to 36 months it attracts short-term capital gains. But, if it is held for a longer time it attracts 20% long-term capital gains.

Lastly, investing in this fund should depend on your investment objectives and a long-term perspective is required.

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