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Gilt Funds – Meaning, Features, Risk & Returns

Updated on: Jun 14th, 2022


8 min read

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Gilt funds only invest in fixed-interest generating securities issued by the Central and state governments. Your investments are directed towards government-funded infrastructure projects and other safe expenses.

How do Gilt Funds Work?

If the Government of India is in need of funds (or loans), then it approaches the Reserve Bank of India (RBI). Apart from being the apex bank, the RBI also acts as a banker to the government. The RBI lends money to the government after borrowing from other entities such as insurance companies and banks. In exchange for the loan, the RBI issues government securities with fixed tenure, to which the fund manager of a gilt fund subscribes. Upon maturity, this gilt fund returns the government securities and receives money in return. For an investor, gilt funds can be an ideal blend of low risk and reasonable returns. However, the performances are highly dependent on the movement of interest rates. So, a falling interest rate regime would be the best time to invest in gilt funds.

Benefits of investing in gilt funds

The following are the benefits of investing in gilt funds:

Exposure to government securities:

Retail investors do not have direct access to some of the government securities. Individuals can gain exposure to such government instruments only through investing in gilt funds. 

Minimal credit risk

Gilt funds are considered to carry minimal to no credit risk as to the government issues the underlying securities. The government may never fail to stand by their obligations, which makes investing in gilt funds suitable for risk-averse investors. 

Excellent returns

Gilt funds are known to provide moderate returns at minimal to no risk. Investing in these funds is suitable for individuals with short to medium-term horizons. 

Who Should Invest in Gilt Funds?

Gilt funds only invest in government securities ranging from medium to long-term horizons. So, these funds satisfy the security needs of investors. They are not the same as bond funds because the latter may allocate a part of the assets in corporate bonds, which can be risky. Gilt funds invest in low-risk debt instruments such as the government securities, which ensures the preservation of capital along with moderate returns. When compared with a typical equity fund, a gilt fund offers better asset quality despite the relatively lower return it offers. It is often considered an ideal investment haven for those investors who are risk-averse and want to invest in government securities.

Things to consider as an Investor

Risk factor

Unlike corporate bond funds, gilt funds are the most liquid instruments as they don’t carry credit risk. The reason being the government will always try its best in fulfilling its obligations. However, gilt funds primarily suffer from an interest rate risk. The net asset value (NAV) of the fund drops sharply during times of an increasing interest rate regime.


Gilt funds are capable of generating returns as high as 12%. However, returns from 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 rates are falling. Also, when the economy as a whole faces a slump, Gilt funds are still expected to deliver higher returns than even equity funds.


Gilt funds charge an annual fee known as expense ratio, which takes care of the fund manager’s fee and other related expenses. This is a percentage of fund’s average asset under management. As per SEBI specifications, the upper limit of expense ratio for debt funds is 2.25%. However, the operating cost of a particular fund may depend on the fund manager’s investment strategy. For instance, dynamic approach means to buy and sell securities as per the changes in the interest rate.

Investment Horizon

Gilt funds invest in government securities, which have medium to long-term maturity periods. The average maturity of a gilt fund portfolio varies between three years to five years. If you are thinking of investing in gilt funds, then you need to have an investment horizon of at least three to five years.

Financial Goals

If wealth accumulation over a medium-term is your goal, then you may consider investing 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 could be the right choice.

Tax on Gains

Capital gains from your gilt fund are taxable. The rate of taxation is based on your holding period, i.e. how long you stay invested in a gilt fund. A capital gain made during less than three years is known as the short-term capital gain (STCG). A capital gain made over three years or more is known as the long-term capital gains (LTCG). Investors will receive the STCG from gilt funds, and he should pay the income tax accordingly. LTCG tax, on the other hand, is a flat 20% with indexation benefits.

How to Invest in Gilt Funds?

Investing in gilt funds is made paperless and hassle-free at ClearTax. You can start your investment journey by following a few simple steps:

  • Sign in at cleartax.in
  • Enter your details such as the amount of investment and period of investment
  • Get your e-KYC done in less than 5 minutes
  • Invest in your favourite gilt fund from amongst the hand-picked mutual funds

Top 5 Gilt Funds in India

While selecting a fund, you need to analyse the fund from various perspectives. There are different quantitative and qualitative parameters to determine the best fund. Also, 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 their past 3-year and 5-year returns:  

Fund Name3 Year ReturnsLink
ICICI Prudential Constant Maturity Gilt Fund8.86%Invest Now!
UTI Gilt Fund8.68%Invest Now!
SBI Magnum Gilt Fund8.17%Invest Now!
ICICI Prudential Gilt Fund7.00%Invest Now!
Canara Robeco Gilt Fund6.95%Invest Now!

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

Summing It Up

Sometimes, investing in gilt funds might be a tense affair. If tracking markets aren’t your thing or if you are finding it too difficult to understand, you can log onto ClearTax Invest. Invest in hand-picked funds in a hassle-free and paperless manner.

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