All You Need To Know About Gilt Funds

Before stepping into the world of mutual fund investment, every investor is faced with a pertinent question – how much risk are they willing to take? Most conservative investors choose debt funds to balance their portfolio and manage market volatility. Among debt funds, gilt funds are considered the least risky.

The article helps reveal everything you need to know about gilt funds.

What are Gilt funds?

Gilt funds are mutual funds that invest in debt securities issued by the central and state governments in India. These fixed-interest generating securities typically have a maturity horizon of medium to long-term. Gilt funds can be bought and sold quickly due to their liquidity.

Understanding how gilt funds work

Whenever the Government of India requires funds, it approaches the apex bank, i.e. The Reserve Bank of India (RBI), for a loan. The RBI confers money to the government after borrowing it from other entities such as banks and insurance companies.

In exchange, the RBI issues government securities with a fixed tenure that the fund manager of a gilt fund can subscribe. Upon maturity of the security, the gilt fund receives the money in exchange for the government securities.

Who can invest in gilt funds?

As noted earlier, gilt funds carry minimal risk. There is no credit risk as the chances of default in government securities is nil. However, gilt funds are susceptible to interest-rate risk. When interest rates are on the rise, the Net Asset Value of a gilt fund could fall dramatically. Likewise, in a falling interest rate regime, gilt funds can be an excellent investment vehicle.

Hence, it can be an ideal investment option for investors looking for moderate returns with low risk. This can help them preserve their capital and free them from the stress of market fluctuation.

Things to consider

Similar to other types of mutual funds, gilt funds also attract an annual fee known as the expense ratio. This accounts for all expenses such as portfolio management, the fund manager’s fees, and other operational costs. It can help to be aware of the expense ratio to maximise your earnings.

Lastly, before you invest in mutual funds of any type, study market trends or interest rate cycles in the past. Since gilt funds are sensitive to interest rate changes, it can be challenging to analyse entry and exit time. In this case, you could take the help of a professional fund manager.


If you wish to invest in mutual funds online and have low-risk tolerance, gilt funds can be an ideal choice. Since there is no credit risk, investors can earn reasonable returns while keeping tabs on the interest rate movements. To maximise the benefits of mutual funds, consider an investment horizon of three to five years and more.

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