While investing, one of the biggest decisions that an investor has to make is determining how much risk he is willing to take with his investment. Should he opt for aggressive growth or capital preservation? Usually, investors with a lower risk tolerance turn towards debt funds for capital preservation. Debt funds come in different types. Of these, Gilt funds are considered to have the lowest risk. Here, we will explore Gilt Mutual Funds and talk about everything that you need to know about them before investing.

What are Gilt Funds in India?

Gilt Funds are debt funds which only invest in bonds and fixed interest-bearing securities issued by the state and central governments. These investments are made in instruments having varying maturities. Since the money is invested with the government, these funds are said to carry minimal risk.

How do Gilt Mutual Funds work?

Whenever the State or Central Government requires funds, it asks the apex bank of the country – The Reserve bank of India (RBI) – which is also the Government’s banker. RBI collects the required funds from banks and insurance organizations and lends it to the state/central governments. In exchange, the Reserve bank of India issues g-secs or government securities with a fixed tenure. Gilt Funds subscribe to these securities. Once the security matures, the fund returns it and receives a payout.

For most conservative investors, Gilt funds are a perfect combination of reasonable returns and minimal risks. However, it is important to note that Gilt Funds are affected by the changes in interest rates. 

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Should you invest in Gilt Mutual Funds?

Unlike bond funds which may invest in corporate bonds, Gilt Funds solely invest in g-secs or government securities. This makes Gilt Mutual Funds low-risk investments which offer reasonable returns along with capital preservation. Hence, they are a good investment option for people with lower risk tolerance and seeking investment opportunities in government securities.

Factors to consider before investing in Gilt Mutual Funds in India

Here are some important aspects that you must consider before investing in gilt funds in India:


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Gilt Funds carry no credit risk as they are issued by the government who never defaults on its payments. However, these funds carry the risk of changing interest rates. If the interest rates rise sharply, the NAV of a Gilt Fund falls drastically.


Since the gains from a Gilt Fund depend on the interest rates changes, they cannot be guaranteed. However, in a falling interest rate regime, Gilt Funds can offer up to 12% returns. If the economy slumps, Gilt Funds can offer better returns than equity funds too!

Expense Ratio

Like all other mutual funds, Gilt Funds also charge a fee for providing fund management services. This fee is called expense ratio – a percentage of the fund’s total assets. This can vary depending on the investment strategy of the fund manager. Look for a fund with a low expense ratio so that you can maximize your gains.

Investment Plan

On average, the maturity of a Gilt Mutual Fund is between three and five years. Therefore, you must have a similar investment horizon to invest in these funds. Further, these funds can help you generate wealth over the medium tenure. Also, if the interest rates are in a falling cycle, then you can earn good returns in the shorter term too. Ensure that you create an investment plan accordingly.

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