Gilt Funds

Gilt funds are the same as debt funds that invest only in government securities. These funds are safe and carry significantly less risk. They are secure investment options, but they are not as liquid as other securities present in the market.  Any growth in the yields of the bonds can put the capital of the investor in danger, as it would also augment the loss potential. Income and investments can fall, unlike the safety of money, and thereby turn back less than they invest.

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How do Gilt Funds function, and how safe are they?

Whenever the State or the Central government is in need of money, they go straight to the Reserve Bank of India (RBI). The Reserve Bank of India offers them money from the insurance providers or banks that provide it to them. In return, the Reserve Bank of India issues government securities for a fixed period of time. Here comes the gilt fund; in this case, gilt funds are subscribed to these securities. These funds go back once the deposit is fully developed and receives a payout.

These fall under the category of Debt Funds and invest majorly in Government securities. Such funds tend to generate returns with the help of the rate of interest risk. The ultimate credit risk is close to zero as it is backed by the government. The expenses of state securities and interest rates are related inversely. This simply means that the prices of state securities go down when interest rates go up. The impact of its performance is instant.

In what securities do Gilt Funds invest?

The government issues securities of varying maturity specifications in India and the gilt funds tend to invest in them. There are two sorts of such funds in India:

Long Term

Such extended duration funds invest in government bonds or securities that are long-dated. The maturity period of these securities are more than 5 years and can go as high as thirty years.  Such future gilt funds are best suited for institutional investors as they are more volatile and risky, and have high sensitivity to interest evolutions.

Short Term

Having a much shorter duration, such gilt funds invest in government bonds and future bonds having a short term residual maturity

Who can Invest in these Funds?

These funds are usually preferred by those investors who want the safety of their investments more than high returns. It provides moderate returns and ensures capital preservation. As compared to an equity fund, it offers better asset quality. Such funds are especially ideal for mitigating risks in a falling market situation. The rate of interest volatility offers high returns and exposes the fund to a rate of interest risk.

Gilt funds can only endow in government securities ranging from medium to long term. As a result, these funds satisfy the safety needs of investors. They’re not equivalent to bond funds because the latter may allocate a portion of the assets in corporate bonds, which may be risky.

What are the Key Benefits of Gilt Funds?

Gilt funds mainly have these benefits in comparison to other investment avenues.

No Credit Risk

As such funds invest in securities of superior credit quality; a guarantee of protection is always there to an extent.

Easy Access to Government Investments

For the typical retail investors, making investments in government securities is not possible. They need an expansive sum of money for it. However, through gilt funds, even such investors are provided with the chance to invest in such government securities.

Average Returns

As gilt funds are known to deliver risk-free returns, they provide the investor with quite a commendable bargain in regards to balancing revenue and risks.

What are the Things an Investor Should Take Care of?

While making an investment in gilt funds, one must take the following things into consideration:

Risk Factor

Gilt funds are liquid instruments and they differ from bond funds, as they do not carry any credit risk. Government shall always strive to ensure to fill its obligations being the prime rationale behind this.   Conversely, such funds largely suffer from a rate of interest risk.


Being extremely adaptable to the evolution within the interest rates, gilt funds are known to generate returns as high as 12%. The returns generated from such funds, however, are not guaranteed.  As a result, it can be prudent to take a gilt fund position when the interest rates are going down. Such funds are expected to provide returns better than even the typical equity funds when the whole economy faces a major issue.


The expense ratio or the annual fee charged by gilt funds take care of a host of charges, including the fee of the fund manager. Usually, this is a percentage of the average asset of the fund under management. As per SEBI specifications, 2.25% is the upper limit of expense ratio for debt funds. Conversely, the operating charges of a particular fund might depend on the investment strategy of the fund manager.

Investment Horizon

Government securities having medium to long term maturity period are usually the ones in which gilt funds tend to endow. In most of the cases, the maturity of a gilt fund portfolio ranges from 3 to five years.  People considering investing in gilt funds should ideally try to have an investment horizon of a minimum of 3 to 5 years.

Financial Goals

Investing in gilt funds to ride on the rate of interest volatility must be considered by an investor if their goal is to accumulate wealth over a medium-term. Gilt funds prove to be a great situation when the investors are trying to identify safer havens to earn short-term returns while the general capital markets are going down.

*All savings are provided by the insurer as per the IRDAI approved insurance plan. Standard T&C Apply

Is this a Correct Time to Invest in Gilt Funds?

Gilt funds and interest rates are chief rivals. One should consider themselves investing in gilt funds when Inflation is near its height. Thus, the RBI (Reserve Bank of India) isn't likely to immediately boost interest rates. This is able to ensure there no downward movement within the Net Asset value and hence returns.

Over to you!

To sum it up, we will say if tracking the financial market closely isn't your cup of team, you'll prefer to invest in gilt funds due to its safety. These funds remain shielded from equity volatility. Gilt Mutual Funds accumulate good returns during times of falling interest rates depending upon their maturity. Investors investing in these funds got to have enough time for tracking their investments since the NAVs of those funds move very sharply with movement in interest rates.

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