Best Gilt Funds – Top 10 Gilt Funds to Invest in 2022

Updated on: Dec 14th, 2023


7 min read

Best Gilt funds are a class of debt mutual funds that invest majorly in the fixed-income securities issued by the state and governments in India. We have covered the following in this article on the best gilt funds:

Introduction to Gilt Funds

Gilt funds are debt funds that invest mostly in the securities issued by the central and state governments in India. These securities are issued by the government when it is in need of funds to finance a particular project. The interest or coupon rate and maturity period of these securities vary. The government securities are issued by the Reserve Bank of India (RBI) on behalf of the government. Gilt funds do not invest in corporate securities, thus reducing the risk level of the fund to a greater extent. Investing in gilt funds is an excellent investment option if you are looking to earn a considerable amount of returns at lower risk levels.

Top 10 Gilt Funds

The following table shows the best gilt funds based on the last 3-year and 5-year returns:

Mutual fund 5 Yr. Returns 3 Yr. Returns Min. Investment Rating

Who Should Invest in Gilt Funds?

Gilt funds are an excellent investment option for risk-averse investors as these funds invest only in the fixed-income securities issued by the state and central governments. Therefore, the returns offered by these are predictable and stabler as compared to other debt mutual funds. First-time debt investors may get started with investments through gilt funds. Since the underlying securities are less volatile compared to other debt securities, it will help investors in building confidence over time. These funds are a good option for those looking to preserve their capital and earn moderate returns.

Taxability of Gilt Funds

Since gilt funds are a class of debt funds, they are essentially taxed like any other debt fund scheme. Dividends offered by these funds are added to your overall income and taxed at your income tax slab rate. This is known as the classical way of taxing dividends and was introduced in the Budget 2020. Short-term capital gains (realised on redeeming your units within a holding period of three years) are added to your overall income and taxed at your income tax slab rate. Long-term capital gains (realised on selling your units after a holding period of three years) are taxable at the rate of 20% after indexation.

Risks Associated With Gilt Funds

The risk levels associated with gilt funds are generally on the lower side as these funds invest in government securities. However, like any other debt fund, even gilt funds are affected by interest rate risk, liquidity risk, and credit risk. Interest rate risk is the possibility of the interest offered by the issuer varying over time. Liquidity risk is the possibility of the fund manager being unable to sell the underlying assets without taking a significant loss. Credit risk is the possibility of the issuers of the underlying assets not standing by their obligations to make coupon payments and repaying the principal invested upon maturity.

Things an Investor Should Consider While Investing in Dynamic Bond Funds

The following are some of the things that must be considered while investing in gilt funds:

  1. Financial Goals Gilt funds are suitable to achieve medium-term goals. The fund manager will make modifications to the portfolio in such a way that the scheme rides the interest rate volatility. Investing in gilt funds is a good option when the markets are down.
  2. Risk factor The risk associated with gilt funds is on the lower side as compared to other debt funds. This is because gilt funds invest in government securities. If you have higher risk-taking abilities, then you may consider investing in other classes of debt funds.
  3. Cost You have to look at the expense ratio of the fund. This is the charge levied on investors by the fund houses to manage their investments. As per the norms of the Securities and Exchange Board of India (SEBI), the expense ratio of debt funds cannot exceed 2.25%. If there are two funds with similar asset allocation and past returns, then you may consider investing in the fund which comes with the lower expense ratio.

Advantages of Investing in Gilt Funds

The following are some of the advantages of investing in gilt funds:

  • The risk levels associated with these are on the lower side.
  • These funds are suitable for risk-averse investors.
  • Investing in these funds is a good option for achieving medium to long-term goals.
  • The returns provided by gilt funds are stabler and more predictable than other debt funds.

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Quick Summary

Gilt funds primarily invest in government-issued fixed-income securities in India, offering stable returns with low risk. They are ideal for risk-averse and first-time debt investors and are taxed like other debt funds. While they have lower risk levels, they still face interest rate, liquidity, and credit risks. Investors should consider financial goals, risk levels, and expenses while investing in gilt funds for medium to long-term goals.

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