Finschool By 5paisa

  • #
  • A
  • B
  • C
  • D
  • E
  • F
  • G
  • H
  • I
  • J
  • K
  • L
  • M
  • N
  • O
  • P
  • Q
  • R
  • S
  • T
  • U
  • V
  • W
  • X
  • Y
  • Z

Gilt Funds are debt funds which only invest in bonds and fixed interest-bearing securities issued by the state and central governments. It invests at least 80% of their portfolio in government securities that have a fixed rate of interest. Gilt funds are open-ended mutual funds which means that you can invest in them anytime that you want to and also redeem the fund at your discretion.

How do gilt funds work?

Whenever the government needs funds for its operations, it asks RBI to help generate the required funds. RBI issues bonds and securities, backed by the government, to institutional investors like banks and mutual funds.

An Asset Management Company (AMC) that issues gilt funds, pools money from investors looking to invest in government securities. Thereafter, at least 80% of the pooled corpus is invested in the government securities that are issued by the RBI. The securities pay interest that adds to the value of the portfolio and generates returns for the investors.

For most conservative investors, Gilt funds are a perfect combination of reasonable returns and minimal risks. However, it is important to note that Gilt Funds are affected by the changes in interest rates.

Why invest in gilt funds?
  • Low exposure to risk- Being debt-oriented, gilt funds is not prone to the volatility of the equity market. As such, in uncertain times, when the equity market is volatile, gilt funds can offer good returns. Moreover, the credit risk is also low considering these funds are issued by the government where the risk of default is non-existential.

  • Protection of invested capital- The money that you invest in gilt funds does not erode due to market volatility. With a low-risk profile, gilt funds protect your invested capital against value erosion.

  • Investment in government securities- government bonds and securities issued by the RBI are not available for retail investors. So, if you want to invest in such securities which have a low to minimal risk, you need to invest through gilt mutual funds.

  • Long term capital gains- If you redeem the fund after 3 yrs., you get the benefit of indexation on the profit earned on redemption. This indexation benefit factors in inflation and reduces your taxable income thereby giving you tax-effective returns.

Things to keep in mind when investing in gilt funds
  • Expense Ratio- Like all other mutual funds, Gilt Funds also charge a fee for providing fund management services. This fee is called expense ratio – a percentage of the fund’s total assets. This can vary depending on the investment strategy of the fund manager. Look for a fund with a low expense ratio so that you can maximize your gains.

  • Returns- In a bullish market, returns on equity would outperform those on gilt funds. The returns from gilt funds are attractive in a bear market when equity is suffering a fall. Moreover, if the interest rates in the economy are falling, gilt funds would offer higher returns and vice-versa.

  • Risk- Gilt Funds carry no credit risk as they are issued by the government who never defaults on its payments. However, these funds carry the risk of changing interest rates. If the interest rates rise sharply, the NAV of a Gilt Fund falls drastically.


Gilt funds are mutual funds that invest primarily in government securities. They have a low-risk profile and give stable returns. When investing, understand gilt funds’ meaning and then invest in suitable funds to diversify your portfolio with exposure to quality government securities.

View All