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What are Gilt Funds: Definition, Risk, And Returns

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While equity funds offer the potential for relatively higher returns, they also carry a higher level of risk than debt funds. Some investors may prioritise less volatility on capital invested over a higher potential return on investment is lower. Other may seek a steady stream of income from their investment at a relatively lower level of risk than equity-based investment instruments.

For such investors, gilt funds can be a suitable choice.

  • Table of contents
  1. What are gilt funds?
  2. Who should invest in gilt mutual funds?
  3. What are the advantages of investing in gilt funds?

What are gilt funds?

Gilt funds are a type of debt mutual funds that invest primarily in government securities issued by the central and state governments of India, and the Reserve Bank of India (RBI). These debt instruments may have different maturity profiles, coupon rates, and yields. According to the Securities and Exchange Board of India (SEBI) mandate, gilt mutual funds must invest at least 80% of their money in debt instruments issued by the Indian government.

Investments of gilt funds

Gilt funds are invested in:

  • Central government bonds
  • State government bonds
  • Treasury bills
  • State development loans
  • RBI fixed rate bonds
  • RBI floating rate bonds
  • Inflation-indexed bonds

The actual investment portfolio of gilt funds may differ. It is important to note here that gilt funds may also invest up to 20% in debt and money market securities other than government securities. You can find this information in the Scheme Information Document (SID).

Who should invest in gilt mutual funds?

You can consider investing in gilt funds if:

  • You are a conservative investor and averse to investments that carry a relatively higher level of credit risk.
  • You have a short to medium investment horizon.
  • You want to diversify your equity-heavy investment portfolio.
  • You are looking for a stable return potential through periodic interest payments received by the scheme.
  • You are a retiree who wants to generate a predictable income stream in the form of periodic Income Distribution cum capital withdrawal (IDCW).

Advantages of investing in gilt funds

Now that you understand the gilt funds meaning, you need to know about the benefits of investing in them:

  • Relatively lower risk: Government securities held by gilt funds are backed by the sovereign guarantee of the central and state governments of India and RBI. This makes them one of the most stable mutual fund investment options available with minimal credit risk.
  • Regular stream of income: Gilt funds can provide a stable return potential by investing in government securities with fixed coupon rates and maturity dates. Investors seeking predictable income streams in the form of IDCW may find this particularly desirable. However, investors must note that after payment of IDCW, NAV will fall to the extent of payout and statutory levy.
  • Portfolio diversification: Investors can use gilt funds to balance out a portfolio heavily invested in equity-based investments and align its risk profile with their unique risk appetite.

To conclude, gilt funds offer investors the opportunity to invest in securities issued by the central and state governments and RBI. Investors stand a chance to get a stable return potential with gilt funds while diversifying their portfolio and prioritising less volatility on capital invested. It is recommended to evaluate their interest rate, expense ratio, and credit quality before adding them to your investment portfolio.


Where are gilt funds invested in?
Gilt funds are invested in central and state government securities across different maturities, issuers, and types. These may include central government bonds, treasury bills, state government bonds, state development loans, RBI fixed-rate bonds, and so on.

How long should I hold my investment in gilt funds?
Gilt funds are suitable for short to medium investment horizons. However, it is imperative that investors consult a financial advisor before making any investment decisions.

How are gilt funds affected by interest rate changes?
When interest rates rise, the bond prices fall. When the interest rates fall, the bond prices rise. Since gilt funds are essentially government bond funds, interest rate changes affect their Net Asset Value (NAV) as well.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.