Gilt mutual funds primarily invest in securities issued by the Reserve bank of India to fund government operations.

The primary function of the central bank is to act as a banker to the government. Both central and state units can approach the RBI if they require additional funds to meet operational expenses. The central bank, in turn, issues interest bearing bonds, which it sells to the residents in exchange for funds. These bonds come with a fixed maturity period, after which investors are disbursed the corpus amount along with proposed interest rates. Mutual funds comprising such government mandated security are known as gilt funds.

A gilt fund with 10-year constant duration entails a fixed maturity period of 10 years and is suitable for long term investment schemes for individuals having a lower aptitude for market risks.

Relation with Interest Rates 

The RBI adjusts the repo rates in the market from time to time, which, in turn, affects the interests at which zero risk instruments are extended. Investing in a gilt fund with 10 year constant duration during times of falling interest rates is profitable, as it returns generated through such investments are higher than the profitability of a risk-free instrument.

On the other hand, due to an increase in the repo rate, market interest rates can rise as well. During such situations, instruments having negligible risk associated tend to be a more profitable investment venture, as it offers high returns when compared to a 10 year gilt fund.

A falling market interest rate due to repo rate cuts drive the returns released from gilt funds subsequently, making it a profitable investment venture. On the other hand, if the market interest rates rise, then, returns from gilt funds are relatively lower.

In the current market, repo rates are consistently falling, and are currently standing at 5.15% after fifth consecutive adjustment in 2019. Hence, investing in gilt funds in such prevailing market trends can be profitable.

Advantages of a 10-Year Gilt Fund

A gilt fund is considered as one of the safest investment options in the market, as it is issued by the union government and the RBI. The corpus amount has negligible risk involved, as the government is liable to pay the money back to the investors. Nonetheless, returns generated on the same can fluctuate depending upon the pattern of interest rate fluctuations in the country.

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The features of a gilt fund can be listed as follows –

  1. Secure investments –

Gilt funds act as one of the most reliable forms of mutual funds available in the market, as at least 80% of the total portfolio is invested in government-issued assets. The government has an obligation of repayment of both principal and interest component of the investment to the public, hence ensuring zero risk to the portfolio.

It is even safer than standard debt funds, as they have associated risks regarding the stability of an issuing company.

  • Risk – 

Even though the corpus amount has zero associated risks as the central government is obligated to pay back the obtained security, returns generated by the same is dependent upon fluctuations of interest rates.

Nonetheless, interest rates are dependent on market repo rates, which are determined by the Reserve bank keeping in mind the speculative demand of investment as well. As a result, specified return rate is always associated with such investments, to entice investors into purchasing NAV units of gilt funds comprising such securities.

  • Time period – 

As the name suggests, gilt with ten-year constant duration comes with a 10 year lock-in period, designed so that the Macaulay duration of the portfolio is fixed at 10 years.

Investors looking for secure forms of investment with zero risk and substantial returns can opt for 10 year gilt funds in India.

Limitations of a Gilt Fund

  • Lower profits 

Gilt funds generate substantially lower returns when compared to equity investments. This is because market fluctuations have a direct impact on the profitability of listed companies, due to a change in the demand patterns and cash flow of the same.

  • Risk factor 

Gilt with 10 year constant duration is not associated with zero risks, despite consisting of securities issued by the central bank of India. Conversely, any fluctuation in the market interest rates causes a change in the returns generated by such funds.


A gilt fund with 10 year constant duration is subject to long term capital gains tax, as the maturity period is longer than three years. After adjustment for indexation, 20% of the total capital earnings (realised amount upon maturity – invested amount) have to be paid as long term capital gains tax.

In case an investor decides upon selling the security before three years, short term capital gains have to be paid on any capital profits. The short term tax rate depends upon the income of respective investors. While individuals having an annual income of less than Rs.2.5 lakh do not fall under the tax paying slab, investors with income higher than Rs.2.5 lakh but lower than Rs.5 lakh have to pay a 10% tax on total earnings.

An income tax slab of Rs.5 lakh – Rs.10 lakh attracts tax at 20%, while income above Rs.10 lakh attracts tax at 30% respectively. Thus, if an investor falling under the Rs. 2.5 lakh – 5 lakh category realise short term capital gains, tax at 10% is payable in total earnings inclusive of capital gains.


Investors having a low aptitude for risk can consider parking their surplus funds in a 10 year gilt India, for the preservation of the corpus amountAlso, individuals aiming to increase their return value can look to invest in such mutual funds when the market interest rates are falling consistently. Investing in such funds requires a long term investment horizon as well, as it comes with a lock-in period of 10 years. Thus, proper financial planning should be undertaken before investing in gilt mutual funds.

When to invest in gilt funds?

As stated above, rate of return on investment (ROI) generated by gilt funds fluctuate as per market fluctuations on interest rates. A downtrend in the interest rates imply bonds being one of the highest return bearing tools when compared with other risk free instruments, ensuring substantial wealth generation by investors in a recessionary trend.

During recession, gilt funds are more common in the market as well, as the government aims to boost aggregate demand rates through both fiscal and monetary stimulus. As a result, individuals often have surplus funds, which can be invested in such secure market instruments which have the potential to generate substantial ROI in the prevailing market trend.

Keeping in mind the benefits and limitations of investing in gilt funds, individuals should thoroughly analyse their liquidity requirements, investment goals, expected returns and market trends before choosing to undertake investments in this avenue.

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