Skip to Main Content

Investing in Gilt funds 2022 – Gilt Fund Meaning, Features & Returns

What are gilt funds & who should invest in them. Here is an article all about gilt funds, how they work, risks, returns & factors to consider before investing.

Gilt funds provide you the best security against credit risk

People invest a certain part of their investment portfolio in debt mutual funds for safety. But, within the debt mutual funds, there are various sub-categories. Some people don’t prefer to take any credit risk at all. For them, gilt funds are the best option. This article will discuss gilt fund meaning, features & returns.

What are gilt funds?

SEBI has categorised gilt funds under the broader category of debt funds. A gilt fund is an open-ended debt fund that invests a minimum of 80% of its total assets in Government securities across maturity. There is a variant of gilt fund known as a gilt fund with a 10-year constant duration. It is an open-ended debt fund that invests a minimum of 80% of its total assets in Government securities such that the Macaulay Duration of the portfolio is equal to 10 years.

Government securities (G-secs) are debt securities issued by the Government. These can be short-term securities (treasury bills) with a maximum maturity period of up to 364 days or long-term securities (dated securities with tenure of more than one year). Using G-secs, the Government raises funds for various purposes, such as funding infrastructure projects like roadways, airports, railways, seaports, etc., for the country's economic development. As the Government securities have a sovereign guarantee, there is no risk of default.

How do gilt mutual funds work?

A gilt fund collects money from its investors and invests it in various Government securities on their behalf. The investors are allotted scheme units in proportion to their investment. The net asset value (NAV) of the scheme moves up or down depending on the movement in the value of portfolio securities. An investor’s profit or loss depends on the movement of the NAV from the price at which they bought the securities.

The RBI issues the G-secs on behalf of the Government. So, the gilt fund manager can subscribe to Gilt securities through the RBI. The RBI credits the interest to the bank accounts of all gilt securities investors. On maturity, the gilt fund manager redeems the securities with the RBI.

Factors to consider before investing in gilt mutual funds

As an investor, you should consider the following points before deciding to invest in gilt mutual funds.

  1. Interest amount: Government securities usually pay interest on a half-yearly basis. The interest amount is reinvested by the gilt fund manager in new securities.
  2. Interest rate risk: While a gilt fund doesn’t have any credit risk, it carries interest rate risk. The value of government securities in the portfolio gets affected by the movement of market interest rates. The price of Government securities has an inverse relationship with market interest rates. So, when market interest rates move up, the price of Government securities goes down. When the market interest rates move down, the price of Government securities goes up.

Should one invest in gilt funds?

An investor should invest in gilt funds for the following benefits:

  1. Investment in Government securities: A gilt fund gives an investor exposure to Government securities. Earlier, investors did not have direct access to the gilt securities market, and hence gilt funds were the only way to invest in G-secs.
  2. No credit risk: A gilt fund invests majorly in Government securities. G-secs have a sovereign guarantee. Hence, gilt funds carry no default or credit risk.
  3. Good returns: While gilt funds carry no credit risk, they offer moderate returns. These are good returns considering they come with no credit risk.

    So, if you are planning to invest for short to medium-term financial goals, you may consider investing in gilt funds. Please be careful while investing in a gilt fund when interest rates are about to rise or have already started rising. During such times, the value of G-secs goes down, leading to a fall in the NAV of gilt fund units, leading to short-term losses for investors.

Top 5 gilt funds

Scheme name
(Direct Plan - Growth Option)
(Rs. crores)
(Absolute Returns)
IDFC Government Securities Fund – Investment Plan1,4662.36%10.20%8.28%
Edelweiss Government Securities Fund1184.85%10.07%8.23%
Nippon India Gilt Securities Fund1,3462.48%9.32%8.04%
DSP Government Securities Fund4313.43%10.06%7.76%
Aditya Birla Sun Life Government Securities Fund1,0353.77%9.39%7.76%

Taxation of gilt funds

The taxation of gilt funds is similar to that of other debt funds.

  1. Short-term capital gain (STCG) tax: If you sell your gilt mutual fund units before 36 months, the capital gain will be classified as short-term capital gain (STCG). The STCG will be added to your overall income and taxed based on your income slab.
  2. Long-term capital gain (LTCG) tax: If you sell your gilt mutual fund units after 36 months, the capital gain will be classified as long-term capital gain (LTCG). The LTCG will be taxed at 20% with indexation benefit or 10% without indexation benefit.

How to invest in Gilt funds

You can choose the Glide Invest platform to invest in gilt mutual fund schemes. While investing through the Glide Invest App, you will have to take the following steps:

  1. Specify your financial goal, for example, retirement planning
  2. The amount you wish to accumulate for the financial goal
  3. The number of years in which you have to achieve the financial goal
  4. The amount by which you will increase your SIP every year

The platform will recommend three investment portfolios based on the above inputs: aggressive, conservative, and balanced. Once you select an investment portfolio, you will see a combination of equity, debt, and hybrid funds recommended for investment. The platform will recommend gilt funds as part of a debt portfolio based on asset allocation.

To read more on similar topics, see below:

To start investing in gilt mutual fund schemes as per your appropriate asset allocation, download the Glide Invest App from Google Play Store or Apple App Store and get started.

Found it interesting? Share it with your friends

Click to start searching
Recent Posts
How To Choose The Right Debt Fund?
All9 minsSeptember 20, 2022
Investing In Gold Vs Mutual Funds
All7 minsSeptember 20, 2022
XIRR Vs Absolute Returns
All7 minsSeptember 20, 2022
PMS Vs Mutual Funds
All9 minsSeptember 20, 2022
Liquid funds vs fixed deposits: Where should you invest in?
All8 minsSeptember 20, 2022
Posts by Categories
Index funds (0)
Personal Finance (1)
Goal Based Investing (2)
MF investing (10)
Types of MF (10)
All (10)

Like What You See? Want to learn the simple ways to make investment stress-free?

Sign up for our newsletter & get the best expert advice & news around the financial world

We won’t annoy you more than once a week, Pinky Promise!