Everything you need to know about gilt mutual funds

gilt mutual funds

Equity investments, it is known, are subject to market risks. Direct investments in the stock market require a thorough knowledge of different industry sectors, companies, and instruments such as shares, debentures, and bonds. Mutual funds are a means to spread one’s risks as seasoned fund managers manage the investments professionally. In this blog, we will discuss gilt funds, a special category of funds.

Mutual funds pool together monies from individuals and invest in different trading instruments such as stocks and bonds. Fund houses collect dividends/interest and capital gains from trades, deduct asset management fees and distribute the balance among investors. Mutual funds are of three types: Stock Funds, Debt Funds, and Index Funds. Debt funds are schemes that invest in debt instruments like debentures and bonds. Gilt mutual funds belong to this broad category though investments are mostly limited to government bonds.

What are gilt mutual funds?

Gilt funds are debt funds that invest primarily in government securities.

A government bond is a gilt-edged asset—-implying that it is the gold standard— where the government assures the investor that the money is safe and will be repaid on maturity.

Interestingly, gilt bonds trace their history back to the British Raj when the bond certificates had thin gold edges, hence the name “gilt.” Please note that US government bonds are not called gilt bonds.

Advantages of gilt funds

  • There is no credit risk or risk of default in payment on the due date.
  • Typically, these bonds have a longer maturity period than bank deposits. Therefore, a fixed, stable income is assured.
  • The income obtained from tax-free government bonds is entirely tax-free.

Typically, most government bonds have a maturity period of over seven years. At the time of bond issuance, the rate of interest is clearly mentioned. The rate remains unchanged during the bond’s tenure, which assures the investor of the promised return at maturity.

How do gilt mutual funds work?

We have seen that gilt mutual funds invest in longer-tenure government bonds that promise assured redemption on due dates. The mutual fund manager takes into account the market conditions, such as inflation, interest rate, and the remaining tenure of the bond. These bonds trade like shares on the stock exchange. Though their prices fluctuate, they are not as volatile as shares. Accordingly, the managers buy or sell existing bonds through stock exchanges and subscribe to new bond issues.

Like stock market returns, bond yield is the investor’s return from a bond. The mutual fund manager, who manages the bond portfolio, will be guided by the yield. Yield is nothing but the bond’s coupon rate—interest rate—-divided by its market price. Since bonds have a fixed interest rate, their demand, and therefore the price, is determined by the prevailing interest rates set by the central banks. When interest rates rise, the market price of these bonds will fall and vice versa.

Should you invest in gilt mutual funds?

Investors come in all shapes and sizes. The types who are not inclined to constantly monitor their investment portfolio but desire a steady income would prefer the safety of gilt mutual funds. Still, it makes sense for investors to be aware of the downside risks.

Factors to consider before investing in gilt mutual funds in India

The rate of interest is fixed at the time of bond issuance. The rates would be lower if the bonds were issued during a recession. Conversely, the investor would lose out on rising interest rates during an inflationary phase.

Since the return on bond investment is fixed, there is no scope for capital appreciation. The investor would, therefore, only receive the invested amount on maturity.

Besides fluctuations in interest rates, the performance of gilt mutual funds is also subject to volatility stemming from important economic events.


As with most investments, gilt mutual funds come with their share of advantages and disadvantages. The investor will need to weigh the options carefully. To be fair, gilt mutual funds should be a good investment choice if the investor is seeking the assurance of a fixed, stable income.

Prudent investors tend to invest in diverse instruments based on individual goals and financial situations.
Happy investing!


Are gilt mutual funds the same as debt funds?

The short answer is “no.” Though gilt mutual funds fall under the broad umbrella of debt funds, debt funds invest in corporate bonds and debentures, which may fetch a greater return than government bonds. The income may be higher, but this will come at the cost of safety. An assurance by the government to repay is deemed more valuable than that offered by a corporate entity. Gilt mutual funds can invest only in government bonds.

Can I liquidate my holdings in case of an emergency?

The rules are similar to any other form of investment. Subject to specific tax-free restrictions like a minimum holding period, these units can be traded at the net asset value rate that the mutual fund stipulates from time to time. You can raise a redemption request and collect the money.

Is gilt fund safe?

Gilt funds are generally considered safe due to their investment in low-risk government securities. However, they may face volatility, especially when interest rates fluctuate.

Are gilt funds better than FD?

Gilt funds may offer better returns than Fixed Deposits (FDs) but come with volatility. FDs are considered safer with fixed returns. Choose based on risk tolerance and financial goals.

What is the difference between gold and gilt fund?

Gold funds invest in physical gold or gold-related securities, while gilt funds invest in government securities. Gold funds are linked to gold prices, while gilt funds focus on fixed-income securities.

Disclaimer: Risk is fundamental to the investment process in Indian stocks. Any discussion of securities in this article should not be considered a recommendation to buy or sell any security. The facts provided are for informational purposes only and should not be considered investment/financial advice from CoinSwitch.

Share this:


Subscribe to our newsletter

Weekly crypto updates and insights delivered to your inbox.

Browse our Newsletter Archive for past editions.


Thank you for subscribing!
Please verify your email to start receiving the latest issues from Switch in your Inbox.
Powered by

Build your crypto portfolio on the
CoinSwitch app today

Scan the QR code below or find us on Google Play
Store or Apple App Store.

Build your crypto portfolio on the
CoinSwitch app today

Scan the QR code below or find us on Google Play Store or Apple App Store.