Mutual Funds

Gilt Funds: Rising Prices and Falling Interest

Created on 27 Nov 2020

Wraps up in 4 Min

Read by 3.4k people

Updated on 10 Sep 2022

Gilt Funds

The year 2020 has turned out to be quite a weird yet interesting year for all of us and even more for the investors of the stock market. Although, during this stressful period of economic disruption, a lot of companies saw a gradual decrease in their share prices, however, surprisingly there also were companies who saw a significant increase in their share prices.

Apart from the various factors contributing to this growth, there is also a different type of investment instrument that saw an increase during this period. In the current times, these funds have been the only fund that gave more than 10% returns in the last year.

These funds are Gilt Funds, which were hardly ever the talk of the market until recently.

We all know how the Indian Mutual fund's industry started with traditional products like equity funds, debt funds a. sector-specific funds, index funds, gilt funds etc.

So, today we will know what 'Gilt Funds' are and understand how they surprised its investors with good returns in an economically disappointing year.

What are Gilt Funds?

Gilt funds are debt funds that invest in government securities. The government bonds were previously issued in golden edged certificates. Hence, this nickname 'Gilt' comes from gilded edge certificates. According to the norms of SEBI, gilt funds have to mandatorily invest a minimum of 80% of their assets in government securities.

Gilt funds come in two types:

The first type is gilt funds that usually invest in government securities across maturities.

The second type are the gilt funds with a fixed maturity of 10 years - these funds must invest a minimum of 80% of their assets in government securities with a maturity of 10 years.

Are Gilt Funds a good option for investors?

Within the past few years, equity markets have shown to have a range-bound movement, which makes gilt funds - that invest in government securities, an excellent investment. 

The credit risk is next to nil because the government has zero risks of defaulting. However, the rate of interest rate risk rises because the market value of debt securities varies with fluctuating interest rates. 

Gilt funds are an important part of asset allocation, with their inverse correlation of stocks and that they could contribute significantly to the yield enhancement of a portfolio.

As said earlier, a falling interest rate of the dominion is great news for gilt funds. In relation to the price of bonds, the Net Asset Value (NAV) of these schemes also goes up. This is the reason why gilt schemes have been performing well in the last one year, ever since RBI started reducing the rates.

Advantages of Gilt Funds:

  1. Helps in Portfolio Diversification.
  2. As the major capital is parked within the government securities, the credit risk is reduced to a great extent.
  3. It will also help you to slice your tax liabilities.
  4. Your capital is in safe hands as a major share of capital is invested into government securities.
  5. Guaranteed returns as the Reserve Bank of India (RBI) plays a crucial part in gilt funds.

Disadvantages of Gilt Funds:

  1. Gilt funds can not be traded like other securities as they are not so liquid.
  2. Like any other Mutual Funds, Gilt Funds are not entirely secure.
  3. Gilt funds directly get affected due to the changes in interest rates.

Top Gilt Funds in India

Here are some of the best performing gilt funds in India, as per recent data*-

  • Nippon India Gilt Securities Fund.
  • UTI Gilt Fund.
  • ICICI Prudential Gilt Fund.
  • SBI Magnum Gilt Fund.
  • Aditya Birla Sun Life Government Securities Fund.

*Disclaimer: It is always advisable to do your own research before investing. Mutual Fund investments are subject to market risks; one should always read all scheme related documents carefully.

What are these rates which RBI is cutting down called?

The rates which the RBI is cutting down are known as repo rates. It is the rate at which the RBI lends money to the banks. It is used by monetary authorities to control inflation.

For example: - If the repo rate is 5% and a bank takes a loan of Rs. 1,000 from RBI, they will pay an interest of Rs. 50 to RBI. So, the higher the repo rate, the higher the value of short-term money, and vice versa.

What is a good time to invest in Gilt Funds?

It is better to invest in gilt funds when interest rates have been rising steadily in the last 3 or 5 years, and the trends forecast them to be increasing in the near future. When you are unsure of your prediction, you can use a 10 - year gilt yield as a guide.

Usually, when past returns for gilt funds are looking very attractive, that is an unfavorable time to invest in them. It is when past 1 - 3 years of returns on gilt funds are negative or in low single digits, that is a good time to invest.


Gilt funds provide a relatively safe mode of investment since it is backed by government support. However, it is advised that before investing in any kind of financial commitment, one must analyse and ensure that the possibilities of risks are low or nil, altogether.

Financial commitments comprise one's lifetime savings, and hence, a careful analysis should always be the way to go before investing. Therein, if one invests in the right area, the returns will be high, and one's financial health will be upscaled.

As responsible and aware citizens, it is our duty to stay aware of the current market situations through mass and social media, as well as expert opinions. These vital financial decisions are to be considered by careful logical and analytical reasoning and judgment skills backed by extensive research.

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Rishika Mukherjee

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Mukherjee is an avid reader and loves to write as much as read. She is the youngest of all but handles chores like a 50-year-old woman. She takes a lot on her plate and somehow, eerily manages to get the job done. As Hazel Grace stated, she could read a good author's grocery list, and so would Miss Mukherjee. 

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