Gilt mutual funds have caught the fancy of the investors in the past few weeks. Why, you ask? The recent turmoil in the debt mutual funds and decent returns earned on gilt funds are the two primary reasons for it. Since these mutual funds invest in government securities, they have almost zero credit risk. However, this does not mean that they do not carry any risk. These funds carry duration risks. Let’s understand everything you need to know about gilt mutual funds before you decide to invest in them.

What is a gilt fund?

They are a type of mutual funds that invest majorly in State Government securities (G-secs) or Central Government that generate a fixed interest.

When the government requires funding, it borrows from the central bank – RBI (Reserve Bank of India). To meet funding needs, RBI further collects the required amount from insurance companies and banks and routes it to the government. In exchange for such funding, the RBI issues g-secs of fixed tenure on behalf of the central government. Gilt mutual funds subscribe to these securities. On maturity, gilt funds return the g-secs and receive a payout in exchange.

Things to consider before investing in these mutual funds

As an investor, you must consider the following points before you invest in gilt funds:

Risk factor

Unlike bonds, gilt funds are the most liquid securities as they do not carry credit risk. However, gilt funds chiefly suffer from an interest rate risk. The NAV of the fund drops severely during times of an increasing interest rate regime.


Gilt mutual funds are capable of producing returns which is as high as 12% p.a. However, the returns are not guaranteed and highly variable in accordance to the overall interest rates. Hence, it is recommended to invest in Gilt funds when the interest rates are tumbling. Notete that even when the economy as a whole faces a crash, gilt mutual funds are expected to deliver more significant returns than equity mutual funds.

Investment Horizon

Gilt funds invest in government-backed securities that have medium to long-term maturity periods. The average maturity of a gilt fund varies between three to five years.

Tax on Gains

Capital gains from your gilt funds are taxable. The rate of taxation solely depends on your holding period, i.e. how long you stay invested in a gilt mutual fund.

Capital gains during a span of less than three years is known as STCG or short-term capital gain. Conversely, capital gains made over a span of three years or more is known as LTCG or long-term capital gains. STCG gains are taxed according to the tax bracket of the investor. LTCG, on the other hand, is charged at flat 20% with indexation benefits.

Mutual fund investment can help you achieve your financial goals. Before you invest in mutual funds, you should ensure that your investment goals and risk appetite are in line with your investment portfolio. Happy investing!