Gilt funds are low-risk investment options that invest in government-backed securities such as bonds and treasury bills. It is a type of debt fund that generates returns at fixed rates over the maturity period. 

Usually, gilt funds invest in instruments with varying maturity periods. Since the government backs these underlying securities, the chances of defaulting on repayment are negligible.

Now that we’ve covered what is a gilt fund, let’s dive deeper into its fundamentals. 

How do Gilt Funds Work?

The Reserve Bank of India (RBI) acts as a banker to the Indian Government. Whenever the Government needs credit, it approaches the RBI to raise funds. Accordingly, the apex body borrows funds from financial entities such as insurance companies and banking institutions to provide money to the government. 

In exchange for this credit, RBI issues fixed income-generating securities with a pre-fixed tenure or maturity period. Gilt fund managers obtain these interest-bearing securities, essentially lending money to the government. On maturity, the issuing body, i.e., RBI acquires back such securities by repaying the principal amount and the interest. 

Typically, a gilt fund serves as an ideal mix of substantial returns and low risks. However, the performance of gilt funds depends largely on interest rate movements. As a result, these funds are more profitable when market interest rates fall and offer less significant gains when interest rates go up. 

For example, suppose the government issues a bond carrying a 6% interest rate p.a. for 7 years. If the interest rates go up to, let’s say, to 8% in the future, the market value of that bond will decline as investors will prefer the securities issued at an 8% interest rate. Hence, a fund that invests in the bond offering 6% interest will realise a fall in its Net Asset Value, thereby offering lower profits to investors. 

Types of Gilt Funds

There are two types of gilt funds:

  1. Gilt funds that invest in government securities with varying maturity periods.
  2. Gilt funds that allocate resources primarily to government securities with a maturity period of 10 years.

Interestingly, these government securities set the benchmark for interest rates in the economy and the money market in general.  

Note that the Securities and Exchange Board of India (SEBI) has made it mandatory for gilt funds to invest a minimum of 80% of its pooled money in government securities. The rest 20% can be invested in any other kind of bond. 

Points to Consider Before Investing in Gilt Funds

Investors may consider the following factors to maximise the benefits of gilt funds and balance their associated risks.


Government backing makes such funds relatively safer than most other mutual fund types. However, gilt funds are not entirely risk-free. They are prone to interest rate risk, and their net asset value is sensitive to changes in market interest rates, as demonstrated above. This means the NAV of gilt funds tends to drop when market rates rise and vice versa.


The returns on gilt funds depend largely on the prevailing repo rate, which the RBI fixes. A hike in the repo rate lowers the profits earned from gilt funds, whereas a dip in the same increases the returns on investment. This is because a repo rate cut leads to a decrease in interest rates, which in turn boosts the price of bonds. Since gilt funds typically invest in long-dated bonds, the returns from them may increase significantly.

Generally, gilt funds deliver consistent returns. This is because the repo rate does not frequently change, except under special conditions. 

Investment horizon

As discussed, gilt funds mostly invest in government securities that usually come with a short to medium-term maturity period. Investors should keep this and their investment goals in mind before buying gilt fund units.

Expense ratio

Essentially, the expense ratio is the annual fee AMCs charge on returns to cover the costs of managing a mutual fund. It is shown as a percentage of a gilt fund’s average asset under management. 

Though the SEBI has set the upper limit of this ratio for debt funds at 2%, it tends to vary per the fund manager’s investment strategy. 


The capital gains from gilt funds attract taxes depending on the holding period. The capital gains you earn on fund units held for less than 3 years will be treated as short-term capital gains. It will be taxed per the income tax slab after being added to your annual income. On the other hand, gains on fund units held for more than 3 years will attract long-term capital gain tax at 20% with indexation.

On that note, let us now discuss the benefits and limitations of investing in gilt funds in brief. 

Perks of Investing in Gilt Funds

Low gilt credit risk

Gilt funds have significantly lower associated risks compared to regular debt funds that primarily invest in corporate bonds. This is because the government is more likely to repay its debts than other entities. Accordingly, there are minimal chances of you losing out on your investment, although the returns might be moderate. 

Moderate returns

In the last couple of years, the best gilt funds have delivered consistent returns between 10% and 15% annually, according to a study by IIFL Securities. This is relatively higher than most other fixed-income investment options, such as bank fixed deposits and recurring deposits. 

Exclusive investment instruments

Certain government securities are not available to retail investors but are open to subscription for institutional fund houses. So, by investing in gilt funds, individuals can invest in the exclusive securities indirectly.

Drawbacks of Investing in Gilt Funds

Prone to interest and inflation risk

As discussed previously, gilt funds can deliver fluctuating profits due to changes in interest rates. Moreover, government securities with a maturity period of 5 years or longer might not offer inflation-adjusted profits. 


When compared to corporate bonds, gilt funds are highly illiquid. This means investors cannot exit gilt funds as and when they intend to. These funds also come with a pre-fixed lock-in period.

Final Word

Gilt mutual funds are risk-free investment options and a viable alternative for bank fixed deposits and other such traditional options. However, the lack of liquidity and risk of losing returns due to fluctuation in inflation and interest rates are considerable with these mutual funds.  To make an informed choice about investing in gilt funds, one can refer to the guide above. 

Alternatively, those who are planning to invest in a liquid option that offers returns mimicking benchmark indices can consider investing in index funds such as NAVI Nifty 50 Index Fund. These are not entirely devoid of risks. However, its “no exit load” facility and the ability to mimic the highs of the benchmark index help generate significant returns.

Navigate to to begin your journey as an investor. 

Frequently Asked Questions

Do gilt funds have a lock-in period?

Gilt funds may feature a lock-in period extending up to 5 years, depending on the scheme. Investors can exit the fund scheme only after the lock-in period is over.

Is a gilt fund a type of equity or debt fund?

Gilt funds are a type of debt fund that primarily invest in state and central government issued securities.

Can I lose money in gilt funds?

In most cases, gilt funds are considered to be risk-free, mostly because these are government-backed. Accordingly, the risk of losing the principal amount is pretty low. 

How to invest in gilt funds?

Investors can put their money in gilt funds either through a third-party investment platform or directly through an Asset Management Company.

Can gilt funds offer negative returns?

These funds can generate poor inflation-adjusted returns. However, negative returns are highly unlikely in this case. 

Before you go… 

  • Looking for instant 🚀 personal loans 24*7 anywhere, anytime? Install the Navi app now!
  • Or, maybe you’re looking to buy that house you’ve been eyeing 🏠 and you need a loan of up to 1.5 crores at an attractive interest rate. Install the Navi app now and get your instant in-principle approval right away!
  • How about an affordable health insurance policy 👨‍⚕️ starting at a monthly premium of just Rs. 240? Install the Navi health app and get your policy under 2 minutes
  • Instead, want to put your savings into action and kick-start your investment journey 💸 But don’t have time to do research. Invest now in Navi Nifty 50 Index fund, sit back and earn from the top 50 companies 
Related Posts