Gilt funds invest in fixed interest, generating government securities of both the central government and the state government. The money collected is typically used for building infrastructure and other government expenses.

In this blog, we seek to cover, how gilt funds work, who should invest in Gilt funds, factors to look for investing in such funds, and the top five gilt funds in India.

Read on!

How Do Gilt Funds Work?

When the government is looking to borrow money, it approaches the Reserve Bank of India (RBI). The RBI, in addition to being the central bank, also acts as the banker for the government.

Thus, the RBI lends money to the government.  RBI takes money from financial institutions such as banks, insurance companies, and the likes. It issues government securities against the loan. These securities are subscribed by the fund managers.

The fund managers return these securities upon maturity and receive the money with the interest/coupon payment (as the case may be).

Thus, if you observe carefully, in gilt funds, the investment is in government securities. These securities have government as a counterparty, and therefore safety is not a concern owing to the sovereign rating.

Also, returns on these securities are dependent on the interest rate, which in turn is dependent on factors such as fiscal deficit, inflation, market liquidity, and monetary policy.

Who Should Invest in These Funds?

Given the instruments in gilt funds are highly safe owing to the government being the counterparty, these funds are meant for risk-averse investors who are primarily looking for capital protection and not high capital appreciation.

Ideally, these would be suitable for senior citizens or individuals who are looking to invest with a short-term horizon. However, these funds have been giving returns in recent times. Funds like, SBI Magnum Gilt Fund are giving returns as high as 11%, which in any case is better than FD or other government securities.

Gilt Funds vs. Bond Funds

Both gilt and bond funds look similar in their style, but they aren’t.

A gilt fund only invests in government securities, whereas a bond fund may or may not invest in government securities. Also, bond funds invest in corporate bonds that may not be as safe as government securities.

Points to Ponder

Before taking any investment decision, an investor should look for the following points –

1. Risk With Gilt Funds

Gilt funds are typically liquid instruments and don’t carry any credit risk.

However, these funds suffer from interest risk, which could result in fluctuating Net Asset Value (NAV). The NAV for the fund falls in the scenario of rising interest rate.

2. Returns in Gilt Funds

The gilt funds have generated healthy returns, as high as 10-12% in the past, but the returns are not guaranteed and typically depend on the prevailing interest rate.

Thus, it is beneficial to invest in such funds in times of falling interest rate.

Gilt funds come with an expense ratio that is used to manage such funds. This expense ratio takes care of the manager’s fee and other related costs.

The Gilt Funds You Can Consider

While selecting a fund, you need to analyze the fund from different angles. You should take into account both quantitative and qualitative parameters to determine the best funds. The following table represents the best-gilt funds in India you can consider investing in from an investment purpose.

Gilt Funds to Consider
Fund Name 1Y 3Y 5Y Expense Ratio Turnover Ratio Category Risk
ICICI Prudential Gilt Fund - Direct - Growth 4.19% 9.78% 5.98% 0.06% NA Debt
15.35% 11.09% 11.9% NA NA NA
Canara Robeco Gilt Fund - Direct - Growth 11.62% 9.34% 10.2% 0.6% NA Debt
UTI Gilt Fund - Direct - Growth 12.4% 10.16% 10.53% 0.7% NA Debt
SBI Magnum Constant Maturity Fund - Direct - Growth 13.37% 9.95% 11% 0.5% NA Debt


To sum it up, we can say if tracking financial market closely isn’t your cup of team, you may choose to invest in gilt funds owing to its safety. These funds remain shielded from equity volatility.

Happy Investing!

Disclaimer: The views expressed in this post are that of the author and not those of Groww