Gilt Funds: Investment Tips and Tricks

Gilt funds are debt mutual funds primarily investing in securities issued by a state or central government. 
When the government of India is seeking a loan or funding, they approach the RBI. Reserve Bank Of India lends money to the government by borrowing it from banks or different financial entities.
Fund managers can subscribe to these issued fundings. That’s how the Gilt funds in India work. Fund houses allocate investors’ money into government-issued bonds and securities.
And as the government is involved, these funds are the safest to invest in.
Our team has gathered some tips for you before you make an investment. Read along.

What is the Investment Regime?

Gilt funds have two types of investment options-

1. Varying Maturity- In this type, fund houses allocate at least 80% of total funds to government security of varying maturity periods. You might come across a slightly higher interest-rate risk in these funds.

2. Ten-Year Constant Maturity- Here, fund managers allocate at least 80% of total assets to government securities with a constant duration of 10 years. The interest-rate risk is comparatively lower in these Gilt funds.

Top 3 Advantages of Investing in Gilt Funds 

1. Opportunity To Invest In Government Securities

Individual investors cannot easily invest in government securities. By investing in these funds, you can invest in both state and central government securities.
This will add another diverse investment to your portfolio.

2. No Default or Credit Risk 

Both the government and the RBI will guarantee your repayments. Gilt funds do not have any default risk, which enables low-risk investment.

3. Decent Returns

Gilt funds may deliver superior returns depending on the interest rate. During a falling interest rate scenario, these funds deliver better returns than bank deposits over a longer duration. 

Things to Consider Before Investing in Gilt Funds

1. Investment Horizon

We would always advise keeping an investment horizon of 3 to even 10 years.
Though there is no lock-in period in Gilt funds, you may receive better returns over a long duration. 

2. Risk Factor

Even though these funds have zero default or credit risk, you must consider interest rate risk. 
Know that the NAV of the single unit of Gilt funds may drop during increasing interest rates. Instead of selling, you can use this opportunity to buy more units. 

3. Financial Goals

Two important things that should align with your financial goals are- (A) The maturity period, and (B) The interest rate.
As mentioned above, the rise/fall in interest rate may cause the NAV to fall/rise too. You can avoid high interest-rate risk by understanding the interest rate cycle. 

You can reach out to our advisors to know when is the right time for you to invest. 

4. Expense Ratio

Similar to any other mutual fund, you will have to pay an expense ratio for Gilt funds too. It’s a small fee that fund houses charge to manage your investments.
As per SEBI guidelines, fund houses can only charge up to 2.25% of total assets in the form of a fee.

Please Note That- Low expense ratio is not always good. You can certainly consider paying a slightly higher expense ratio if the returns are worth it. You sure can maximize your gains if the expense ratio is low. But what if the gains themselves are low? 

Taxation On Gilt Funds

You will have to pay tax on short-term capital gains (STCG) and long-term capital gains (LTCG) on Gilt funds. 
After the new tax ruled from April 2023, 

Tax on both STCG (investment held for less than 3 years) and LTCG (investment held for more than 3 years) will be considered as per your tax slab.

The indexation benefit is no longer applicable for pure debt funds. Only hybrid funds with more than 35% equity exposure can benefit from indexation. 

Who Should Invest in Gilt Funds?

Investors who are interested in exploring government securities and wouldn’t mind a longer investment horizon can invest in these funds.
In our experience, if bought at the right time, Gilt funds can compete with equity funds in terms of returns; especially during falling interest rates.


Debt funds have become a popular investment option in the past few years. Investors are willing to explore diverse debt instruments to balance the risk and returns.  
Gilt funds are one of the safest debt funds as there is no default or credit risk. Investors interested in Government bonds and securities should absolutely consider investing. 
Keep in mind that, you may come across interest rate risk. To balance that, hold your investment for a longer duration, at least 3-5+ years.
To know more about Gilt funds and investment options, reach out to us anytime. Advisors at VNN Wealth can help you choose the gilt fund suitable for your portfolio. Evaluate your profile and plan your next investment with us.

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