What Are Gilt Funds?

“Gilt Funds” belong to a specific category of “Mutual Funds”, which solely invests in financial securities that are either State government based or Central government based and provide a fixed rate of return. RBI (Reserve Bank of India) provides funding to the government, whenever the latter is in need of funds and to attain the number of required funds, RBI accumulates the amount from Banks and Insurance companies and reroutes the funds towards the government. When the whole process has been done then g-secs of a fixed nature are issued by the RBI on account of the government.

Gilt funds can be defined as a form of subscription to certain kinds of government financial securities. And when the maturity period is reached, g-secs are returned by gilt funds and in return, a payout is received. To ensure that the whole process works completely by the book, SEBI (Securities and Exchange Board of India) has laid down a set of regulations, to ensure the safety of investor’s principal amount. The regulations entail that these kind of mutual funds should ensure that 80% of their total assets are invested in government backed financial securities.

There are two categories of “Gilt Funds”. The first category is known as “Short Term Gilt Funds”, which have a smaller time period (maturity period) of less than a year and the latter category is known as “Long term Gilt funds”, which have a maturity period ranging from 10 to 15 years. The most important thing about “Gilt Funds” is that they have a “zero default risk” because they of the fact that they are backed by the government (Central or State). But they also have an extremely high-interest rate risk. So an investor must carefully assess his decision of investing in these kinds of funds.

The financial securities which are backed by the government only set the precedent for interest rates in both the “financial market and the economy”. A large stratum of Mutual fund managers usually refrains from advising their clients to invest in “Mutual Funds”. Because according to them “Gilt Funds” are only meant for investors who have years of experience in the financial market and are ready to face the possibility of severe repercussions. So if an investor is looking to invests in “Gilt Funds”, he is highly advised to pre-determine his entry time and exit time from these kinds of funds.

These kinds of mutual funds belong to the category of “low-risk mutual funds”, which offer a good rate of return along with the conservation of the capital amount. An investor who is looking for those kinds of financial securities that are backed by the government and provide a fixed rate of return, then “Gilt Funds” will be the most suitable option for him. In certain cases when the interest rates rise sharply, then NAV (Net Asset Value) of a Gilt fund fells sharply. Gilt funds are a safer investment option but they are still extremely volatile because of possessing an extremely high-interest rate risk”.

Factors To Consider Before Making An Investment in “Gilt Funds”

The decision of an investor to make an investment in “Gilt Funds” must involve complete and thorough research of several factors, which have been mentioned below:-

  • “Investment period and the average maturity period”

If we go by the advice of experienced mutual fund managers, then “a longer maturity period of the gilt funds, leads to heightened responsiveness in the interest rates. On an average basis “Gilt Funds” carry a maturity period of three to five years. So if an investor is looking to invest in these kinds of funds, then he must agree with the aforementioned time period. But if the interest rates are falling steeply, then an investor can earn higher returns over a short period of time.

  • “Interest Rate Risk”

If there is a rise or fall in the interest rates in the financial markets then the concerned Gilt fund’s net asset value will also see either an upward trend or a downward trend”. This leads to a serious level of instability in the fund’s return. So if the interest rates in the economy are falling at an advance rate because of certain decisions taken by the RBI, then the interest rate on deposits in the banks will be very less. But under the same circumstances, “Gilt Funds” generate a higher rate of returns.

  • “Expense Ratio”

The fund management services provided by “gilt Funds” are not free of cost instead there is a “fee” for the aforementioned services. The fee is also called as “Expense Ratio” and it’s modified according to a particular mutual fund manager’s investment strategy.     The expert investors advice that “Every new investor should look for those kinds of Gilt funds, which have a low expense ratio so that they can receive a high rate of return”.

  • Investment Plan

An investor must ensure whether “Gilt Funds” are a profitable investment option or not, which he will only be able to decide by assessing the state of his current portfolio. Because of “Gilt Funds” having a zero credit risk, they become a safer investment option but they also have a high-interest risk which can discourage investors from investing. So it advised to an investor that if he is planning to make an investment in “Gilt funds”, then he must set his plan for the long term so that he can receive stable or even higher returns on his principal investment amount. Currently, most of the “Gilt Funds” in India, have a basic maturity period of seven years. So if an investor has planned for a long term investment in financial securities which have a fixed rate of return, then ‘Gilt Funds are the perfect option for him.

  • “Exit Pathway”

Before making an investment in these kinds of mutual funds, an investor must also decide his exit pathway. And exit alternatives that are accessible to an investor in the case of “Gilt funds” are the same in comparison to other kinds of “Mutual Funds”. But the exit pathway is not completely independent, it has it’s dependency on the fact that whether the Gilt fund is an “Open-ended fund” or “Closed-ended fund”. In the case of an open-ended fund, the accessible exit pathways are “trading in the secondary market, the option to redeem after the lock-in period but before the period of maturity, redemption after maturity period, systematic withdrawals and switch-ins”. But in the case of a closed-ended fund, the accessible exit routes are “trading in the secondary market and redemption upon completion of the maturity period.

Who Should Invest?

  • An investor who has years of experience in the financial market and has a risk tolerance.
  • An investor who is looking for a “low credit risk financial security” is highly recommended to make an investment in “Gilt funds”.
  • An investor who wants to diversify his debt portfolio.


An investor is advised to make an investment in “Gilt Funds” only if he is in agreement with the aforementioned points. Also, investors must keep in mind that the conditions of the present financial market are always subject to change.

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