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Gilt funds invest in fixed-interest generating securities of the Central Government and state governments. This money goes towards infrastructure building and other government expenses. Yes, it is a chance for you to become part of the nation-building process while earning returns.

This article covers the following:

1. 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 the banker to the government. Hence, 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.

2. 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.

Compared to a typical equity fund, a gilt fund offers better asset quality, even though the returns might be relatively lower. However, it is an ideal investment haven for those investors who are risk-averse and want to invest in government securities.

3. Things to consider as an Investor

a. Risk factor

Unlike corporate bond funds, gilt funds are the most liquid instruments as they don’t carry credit risk. The reason is that the government will never default on fulfilling its obligations. However, Gilt funds suffer primarily from interest rate risk. The net asset value (NAV) of the fund drops sharply in a rising interest rate regime, and this happens because it leads to a fall in the prices of the underlying asset of the fund.

b. Returns

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. Additionally, when the economy as a whole faces a slump, Gilt funds are still expected to deliver higher returns than even equity funds.

c. Cost

Gilt funds charge an annual fee known as expense ratio, which takes care of the fund manager’s fee and other related costs. 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.

d. 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.

e. Financial Goals

If wealth accumulation over a 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

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% after indexation and 10% without the benefit of indexation.

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:

  • Sign in at
  • 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 favorite gilt fund from amongst the hand-picked mutual funds

5. Top 5 Gilt Funds in India

While selecting a fund, you need to analyse the fund from various perspectives. There are various 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 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

3-year returns

UTI Gilt Fund – GrowthGilt Fund


Reliance Gilt Securities Fund- GrowthGilt Fund


IDFC G Sec Fund – Investment Plan – Regular Plan – GrowthGilt Fund


SBI Magnum Gilt Fund – GrowthGilt Fund


DSP Govt Sec Fund – Direct Plan – GrowthGilt Fund


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

6. Summing It Up

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

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