Gilt funds: Definition, characteristics, risks, and returns

Equity and debt funds are the two main categories of mutual funds. Both types of funds have benefits and drawbacks. Since equity mutual funds invest primarily in equity instruments, their returns are unpredictable. Therefore, these funds are not considered ideal for obtaining fixed returns due to the market’s turbulence.

On the other hand, debt funds invest primarily in fixed-income securities, including treasury bills, commercial papers, corporate bonds, and other types of bonds and debt securities. For short to medium term, these funds are comparatively safer than equities funds. There are various sorts of debt funds; gilt funds being one of them.

What are gilt funds?

Bonds and treasury bills are examples of government-backed assets included in low-risk investing alternatives called gilt mutual funds. This particular debt fund generates returns throughout the maturity period at set rates.

Debt securities produce interest income, which is how with gilt funds you can receive the returns. Changes in the interest rates influence a gilt fund’s performance. Consequently, gilt funds are highly advised throughout the period of dropping interest rates. It’s because prices start to increase when interest rates begin to decline. The Net Asset Value (NAV) of gilt funds rises as a result.

Taxation on gilt funds

Capital gains made on gilt fund investments are taxable, depending on the duration for which held.

  • Short-term capital gains are returns made within 36 months of the fund investment. These gains are taxed at your income tax slab rate and added to your taxable income.
  • Long-term capital gains are returns realised more than 36 months after the original investment. Such gains are subject to a 20% tax rate with indexation benefits.

Benefits of gilt funds

  • Comparatively better returns

If you are investing for the short to medium term, gilt funds still offer respectable returns compared to many other traditional investment options. This is a great choice for risk-averse investors because of the low risk involved.

  • Lower credit risk

Even though gilt funds are a comparatively safer option than equities, they do carry a certain degree of risk. Credit risk refers to the borrower’s inability to pay back investors’ dues. However, considering that such mutual funds are backed by the government, it is widely believed that the government will not default on the payments.

Features of gilt funds

  • Risks

Government support makes such funds comparatively safer than most other mutual funds. Gilt funds are not entirely risk free, however. These funds are vulnerable to interest rate risk, and their net asset value is susceptible to changes in market interest rates. This indicates that when market rates increase and vice versa, the NAV of gilt funds typically decreases.

  • Investment horizon

Government securities with a short- to medium-term maturity period make up most of the gilt funds’ investments. Before purchasing units of a gilt mutual fund, you should bear this in mind along with the investment objectives.

  • Expense ratio

Gilt funds impose an annual fee known as an expense ratio to cover the fund manager’s fee and other associated costs. This is a portion of the typical asset under management for the fund. Depending on the fund manager’s investment philosophy, this may change. Look for a fund with a low expense ratio to optimise your profits.


Mutual funds like gilt funds networthexposed invest mostly in government securities. They provide predictable returns and have a low-risk profile. These could be ideal for investors who have a low risk appetite but want to earn returns that are above those given by traditional investment avenues.

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