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

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?

When the Government of India requires funds (or loans), it approaches the Reserve Bank of India (RBI). Apart from being the apex bank, RBI also acts as banker to the government. So, the RBI lends 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 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 returns 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 the 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 such as government securities which ensures the preservation of capital along with moderate returns.

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 want to invest in government securities. Yes, capital protection over higher returns! 

Gilt funds

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 government will never default 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 faced a slump Gilt funds have been known to deliver higher returns than even equity funds.

c. Cost

Gilt funds charge an annual fee known as expense ratio, which takes care of 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, operating costs of a particular fund may depend on the fund manager’s investment strategy. For instance, dynamic strategy 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. In fact, the average maturity of a gilt fund portfolio may be around  3 to 5 years.  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

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

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 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). Investors will receive the STCG from gilt funds and he should pay the income tax accordingly. LTCG tax, on the other hand, is a fixed 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:

– Sign in at

– Enter your personal details regarding 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 analyze the fund from different angles. There are various quantitative and qualitative parameters to determine the best. 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. Summing it up

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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