Gilt funds are those funds which invest in fixed-interest generating securities of the central and state governments. You earn returns from gilt funds in the form of interest accrued and capital appreciation on the amount invested.

This article covers the following:

  1. How do Gilt Funds work?
  2. Who should invest in Gilt Funds?
  3. Things to consider as an investor
  4. How to Invest in Gilt Funds?
  5. Top 5 Gilt Funds in India
  6. Conclusion


1. How do Gilt Funds work?

Gilt funds are a type of debt funds which invests in government securities, central government loans and state development loans of medium to long-term horizon. When the Government of India requires funds, it approaches the Reserve Bank of India (RBI) for borrowing needs. Apart from being the apex bank, RBI also acts as banker to the government. So, the RBI lends the money to the government after taking it from other entities like insurance companies and banks.

In return for the loan, the RBI issues government securities having a specific tenure, which are subscribed by the fund manager of a gilt fund. Upon maturity, the gilt fund returns the government securities and receives the money in return. For an investor, gilt funds can be an ideal blend of safety and reasonable returns. However, the returns are highly dependent on the movement of interest rates and a falling interest rate regime would be the best time to invest in gilt funds.


2. Who should Invest in Gilt Funds?

As Gilt funds only invest in government securities of different time horizons, these funds satisfy the security needs of the investors. You may thus consider the underlying assets of Gilt funds as AAA grade investments. Gilt funds are not the same as bond funds because the latter may allocate a part of the assets in corporate bonds which can be quite risky. However, gilt funds invest in low-risk debt such as government securities which ensures the preservation of capital along with moderate returns.

As compared to a typical equity fund, a gilt fund provides better asset quality, even though the returns might be relatively lower. However, it is ideal investment haven for those investors who are risk averse and are seeking an opportunity to invest in government securities. Hence, Gilt Funds are meant for individuals who prefer the safety of investments over higher returns. Before finalizing on a gilt fund remember to keep your risk appetite and financial goals in mind.

Gilt funds

3. Things to consider as an Investor

a. Risk

Unlike corporate bond funds, Gilt funds are the most liquid instruments because these funds don’t carry credit risk. The reason is that government has not defaulted on fulfilling its obligations. However, Gilt funds suffer largely from interest rate risk. The net asset value (NAV) of the fund drops sharply in a rising interest rate regime. This happens because it leads to fall in the prices of the underlying asset of the fund.

b. Returns

Gilt funds have found to generate returns of as high as 12%. However, returns from a Gilt Funds are not guaranteed and highly variable with the changes in the overall interest rates. Hence, it would be beneficial to invest in Gilt funds when the interest rate is falling in the economy. Additionally, when the economy as a whole is facing a slump then Gilt funds may deliver higher returns than other asset classes like equity funds.

c. Cost

Gilt funds charge an annual fee known as expense ratio which takes care of fund manager’s fee and other associated costs. This is expressed as a percentage of fund’s average asset under management. The upper limit of expense ratio for debt funds has been specified by SEBI as 2.25%. However, operating costs of a particular fund may depend on the investment strategy implemented by the fund manager. Ultimately, you need to choose a fund with a lower expense ratio.

d. Investment Horizon

Gilt funds invest in government securities which have a maturity of medium to long-term. In fact, the average maturity of a gilt fund portfolio may be around  3 to 5 years. In case the fund manager is following a dynamic strategy, he keeps buying and selling the securities as per the changes in the interest rate environment. If you are thinking of investing in gilt funds, you need to have an investment horizon of at least 3 to 5 years.

e. Financial Goals

Gilt funds can be used by investors for a number of financial goals. If wealth accumulation in the medium term is your goal, then you may invest in gilt funds to ride on the interest rate volatility. In other situation when the overall capital markets are going downwards and you are looking for safer havens to earn short-term returns, then gilt funds may be an option.

f. Tax on Gains

When you invest in gilt funds, you earn capital gains which are taxable. The rate of taxation is based on how long you stay invested in a gilt fund called as the holding period. A capital gain made during a period of less than 3 years is known as a Short-term Capital Gain (STCG). A capital gain made over a period of 3 years or more is known as Long-term Capital Gains (LTCG).

STCG from gilt funds are also added to the investor’s income and taxed according to his income slab. LTCG from gilt funds is taxed at the rate of 20% after indexation and 10% without the benefit of indexation.


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4. How to Invest in Gilt Funds?

Investing in Gilt Funds is made paperless and hassle-free at ClearTax.

Using the following steps, you can start your investment journey:

Step 1: Sign in at

Step 2: Enter your personal details regarding the amount of investment and period of investment

Step 3: Get your e-KYC done in less than 5 minutes

Step 4: Invest in your favorite gilt fund from amongst the hand-picked mutual funds

5. Top 5 Gilt Funds in India

While selecting a fund, you need to analyze the fund from different angles. There are various quantitative and qualitative parameters which can be used to arrive at the best Gilt Funds as per your requirements. Additionally, you need to keep your financial goals, risk appetite and investment horizon in mind.

The following table represents the top 5 gilt funds in India based on the past 3 year returns. Investors may choose the funds based on a different investment horizon like 5 years or 10 years returns. You may include other criteria like financial ratios as well.


Fund Name Returns
1 year 3 year 5 year
ICICI Prudential Gilt Fund 5.24 8.24 8.45
Reliance Gilt Securities Fund 3.62 7.97 8.47
Canara Robeco Gilt PGS Fund 2.27 7.87 8.22
UTI Gilt Fund 2.98 7.84 8.87
SBI Magnum Gilt Fund 2.86 7.76 9.34

*The order of funds doesn’t suggest any recommendations. Investors may choose the funds as per their goals. Returns are subject to change.

6. Conclusion

Many a time investing in gilt funds might be a jittery activity. In case tracking financial markets isn’t your thing and you are finding it too difficult to understand, then just go for ClearTax Invest. You can invest in hand-picked funds in a hassle free and paperless manner.

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