What is Gilt Fund ?

5paisa Research Team Date: 24 Apr, 2024 06:45 AM IST


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Gilt funds are a type of mutual fund that invests in government bonds. These funds are part of the larger category of debt funds.  To understand gilt funds, first understand government securities.

A government security, abbreviated G-Sec, is a debt instrument issued by the Central Government or State Governments to raise revenue for public expenditure. G-secs are issued by the Reserve Bank of India (RBI), India's central bank. They are described to as "gilt" because, due to their government guarantee and rating, they do not have a default risk. 

What are Gilt Funds?

What is a Gilt Fund?

If the government needs additional funding, it immediately goes to the RBI – Reserve Bank of India. RBI gives funds to governments after borrowing from other companies such as insurance entities and other banks. In return for this loan, RBI issues fixed period securities which an experienced and dedicated fund manager subscribes. These government securities are returned on maturity, and the investors get back the money they invested. These funds are an ideal combination of less risk and rational returns for investors. However, the service is based mainly on the movement of interest. Therefore, the best time to invest in a valid fund is when interest rates fall.
 According to the SEBI standard, gilt funds are obligated to invest a minimum of 80% of assets of securities issued by the government. National bonds were previously issued using golden-edged certificates, where these investments got their name.

Types of Gilt Funds

There are two main kinds of valid gilt funds. The first is when investments are made in typical government securities, usually satisfactory funds. The second kind is those funds that come with ten years of constant maturity. They need to invest a minimum of 80% of the assets in government-initiated securities for ten years.
As these systems invest in state-owned securities, investors should rest assured that these are low-risk investments. But they may have high-interest rates, which also greatly influence the money market and economy interest rates. The benchmark is the most traded 10-year government bond. Its yield action creates the base of trading in the fund or bond market. For example, traders who want to invest lucratively look for opportunities based on spreads or interest rate differentials between the government-initiated and corporate bonds or between a 10-year bond and another state/central government bond.

The Advantages of Investing in Gilt Funds

1. Experience with government securities
Private investors generally have no access to government-initiated funds and securities. Gilt funds are a great opportunity for retail investors to gain exposure, expertise, and experience by investing in such bonds initiated by the government and making the most of the low risk and decent returns.
2. Minimal credit risk
Gilt mutual funds have the least or no risk because these are securities issued by the government. 
3. Excellent return
Gilt funds maximize returns and are suitable for medium-term periods.

Who Should Invest in a Gilt Fund?

Gilt funds are for investors interested in putting their funds in government bonds with medium-to long-term investment periods. These are not the same as market or asset-based corporate funds, but they have the potential to meet investors' security and reliability needs.

Compared to equity funds, gilt funds offer a great asset quality besides having low yields. These are ideal investments for risk-averse investors.

Factors to Consider as an Investor

1. Risk factors
Because the government does its best to fulfill its obligations, the overall risk is quite low. However, gilt funds still have to bear risk mainly due to interest rates. This can result in a sharp decline in the Net Asset Value (NAV) at the time of an increased interest rate.
2. Revenue
Gilt funds can produce up to 12% revenue, which, however, are not guaranteed and can vary due to changes in the total interest rate. Despite the slump in the economy as a whole, gilt funds have the potential to generate higher returns as compared to equity funds.
3. Cost
Gilt funds charge an expense ratio which is its annual fee. This covers the fund manager's fees and other costs. According to SEBI requirements, the maximum cost ratio is 2.25%. However, there could be a variation in the operating costs depending on the strategy initiated by the fund manager.
4. Investment period
Gilt funds are usually for medium- to long-term maturities varying between 3 - 5 years.
5. Financial goals
If your goal is to build wealth in the medium term, you can invest in gilt funds to take advantage of the interest rate volatility. Additionally, the gilt fund may be the apt choice if you're looking for low risks and short-term returns.
6. Profit tax
Capital gains from the gilt fund are taxable. The tax rate depends on your holding period. Capital gains achieved within three years are known as Short-Term Capital Gains (STCG), while those achieved after three years are called Long-Term Capital Gains (LTCG). Investors who receive STCG from the gilt fund pay income tax accordingly. The LTCG tax is a 20% flat-rate tax and has the advantage of indexing.



Risks of Investing in Gilt Funds

Gilt funds also carry their risks:

  • Interest rate rise regime - Gilt fund returns fall under the interest rate enhancement regime. The reverse relationship between bond prices and interest rates can affect the gilt fund returns.
  • Low liquidity - Investing in government securities through gilt funds is safe and secure but is not as liquid as equity stocks in the market. It is difficult to switch government bonds.
  • Cost - Gilt funds charge a management fee, which is a cost ratio limited by SEBI to 2.25% of the NAV. Investors need to be careful when choosing a fund.
  • Investment period - Gilt funds invest in government bonds with medium- to long-term maturities. The average maturity of this portfolio varies between three and five years.

Which Kind of Securities Does the Gilt Fund Invest In?

Gilt funds invest in government-issued securities with various kinds of maturities like:
Long-term gilt fund:
It is a long-term fund wherein investors can invest in long-term/government bonds. The period is more than five years and can go up even till 30 years. 
Short-term monetary fund:
This is a short-term fund wherein the investment is made in short-term government bonds or long-term bonds with short-term maturities.

Commonly Asked Questions about Gilt Funds

1. How to invest in gilt funds?
You can invest in gilt funds in a hassle-free manner either through an agency, a reputed firm, or in a proper paperless form. All you need to do is to fill out an online form and start with your investment journey. You must follow these steps:
You can go to any site and sign in using a username and password.
You must enter all your details like your name, number, age, address, and phone number. Once you have entered your details, you can choose the appropriate gilt fund you are interested in.
Enter the amount you want to invest in the fund and other important details like mode of payment, tenure, etc. You can also use a calculator to estimate your returns on the same.
It will take less than 5 minutes to get your e-KYC done, and you can also download and upload necessary documents like identity card, address proof, and age proof.
Out of the entire list of gilt funds available to invest in, you can choose your favorite or the safest one and invest in it.
2. What is the appropriate time period to invest in your gilt funds?
Normally, gilt funds are invested in government securities, considered the safest kind of investment for a medium or a long tenure ranging from six months to five years. Your investment horizon can also be above five years, but this is the ideal tenure for investing in gilt funds. If you increase the duration of investment, chances are that you may earn better returns, and it may further reduce your risk on these investments.
3. How are the returns of gilt funds calculated?
Lately, the average returns delivered by gilt funds range between 3 - 3.06% p.a. returns in a single financial year. The returns for three years can be calculated as 7.98% per year, and for five years, the annualized returns are 7.07% per annum.


Due to lower interest rates, India's gilt funds have been working quite favorably. Gilt funds have generated two-digit returns for investment trusts in India. But the rate of interest can be quite volatile, resulting in negative returns. People who invest in gilt funds need to be cautious, but otherwise, gilt funds are regarded as safe investments.

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