What Are Gilt Funds? – Clear All Your Doubts!

You are probably here because you discovered a new term called “Gilt funds“. Gilt funds are a fascinating investing option that often flies under the radar leaving many investors unaware of their potential benefits.

In this guide, we will help you explore all the information you need to understand gilt funds. Additionally, this guide will assist you in clearing your potential doubts. So, let’s dive in.

Gilt Funds – Meaning, Full Form & Explanation

Among three broad categories of mutual funds- equity, debt & hybrid, the second is considered less risky than the other two.

These funds i.e. debt funds are also categorised into various subcategories to present the market with different levels of risk to reach each type of investor. Gilt funds which stand for Government Issued Long Term Funds are one of these debt funds.

Gilt Funds invest exclusively in government securities (g-sec). These funds are considered low risk or sometimes “risk free” as the government is less likely to default on its promises.

Further Reading: Different Types of Mutual Funds

Chief Types of Gilt Funds

There are two main types of Gilt Funds. Constant Maturity & Fixed Maturity Gilt Funds.

1. Constant Maturity Gilt Funds

In these funds, the fund manager aims to maintain a desired average maturity by actively buying and selling government securities with varying maturity dates.

2. Fixed Maturity Gilt Funds

Fixed Maturity Gilt Funds are designed with a specific maturity date in mind. The fund manager invests in government securities that mature corresponding to the fund’s maturity date.

Types of government securities Gilt Funds Invest In

Gilt funds invest in various types of government securities which may or may not include:

  1. Government bonds: Long-term debt instruments issued by the government that offer fixed interest payments at maturity.
  2. Treasury Bills: Short-term government securities with maturity from a few days to one year. These are offered at a discount to their face value.
  3. State Development Loans: SDLs are debt instruments similar to government bonds but they are issued by individual states.

Gilt funds Interest rate

Gilt fund’s Interest rate in India ranges from 5% to 10% or sometimes more. However, the interest rate that Gilt Funds offer may vary depending upon various factors that may affect the performance of Gilt Funds. Those factors may be:

  1. Inflation: Inflation is a crucial factor that impacts interest rates.
  2. Economic Growth: The overall economic growth can influence the interest rates and the performance of Gilt Funds.
  3. Global Market Conditions: Internation market factors such as global interest rates, geopolitical events & economic indicators can influence the performance of Gilt funds.
  4. Liquidity Conditions: Adequate liquidity can contribute to stable yields while illiquidity can increase transaction costs and affect interest rates.
  5. Policy & Regulatory Changes: Changes in government policies & regulations such as monetary policy, taxation rules etc. can impact the interest rate and performance of Gilt Funds.

Are Gilt funds better than FD?

Which one is better is completely a relative perspective but one can determine which one is better for him/her by considering various factors and conducting a comparison between these two. Here are some factors to take a look at:

Further Reading: Know about Short-Term FDs

1. Risk & Safety

Gilt funds are backed by the government and hence they are considered low-risk or risk-free. On the other hand, FDs are offered by banks and considered safe but they carry deposit insurance up to a certain limit.

2. Returns

Gilt funds are more likely to generate higher returns than FDs over the long term. It is to be noted that Gilt funds do not promise specific returns just as fixed deposits do.

3. Liquidity

FDs come with a fixed tenure and hence early withdrawals may attract penalties or interest rates reduction. On the other hand, Gilt funds offer better liquidity as you can buy or sell the units of funds on any business day.

4. Taxation

Interest earned from FDs or Gilt Funds is generally taxable as per the investor’s income tax slab.

Gilt Funds vs Debt Funds

Both gilt funds and debt funds invest in fixed-income securities & debt-oriented instruments but there is some basic difference between them.

A debt fund may invest in a mix of fixed-income securities like government bonds, corporate bonds, money market instruments, debentures etc. On the other hand, a gilt mutual fund specifically invests in government securities issued by the central or state governments.

Gilt Funds Vs. liquid funds

As we discussed above, Gilt funds are vulnerable to interest rate risks and they may not guarantee stable returns in the short term. However, they have the potential for good returns in the long term.

If we talk about liquid funds, they have very short investment periods typically from a few days to a few months. Additionally, they aim to provide a high level of liquidity and stable returns in the short term.

Are gilt funds tax-free?

NO, Gilt funds are not completely tax-free. The tax treatment of gilt funds depends on the holding period and the type of capital gains generated.

A capital gain made during three years is called short-term capital gain (STCG) & a capital gain over three years is known as long-term capital gain (LTCG).

Before April 2023, tax on short-term capital gains was levied according to income tax slab rates and tax on long-term capital gains was flat at 20% with indexation benefits. After that, STCGs & LTCGs will be subject to tax according to income tax slab rates.

Who Should Invest In Gilt Fund?

Gilt funds may be a good option for investors with lower risk tolerance, longer investment horizon and seeking exposure to government securities with the potential to generate good returns in the long term.

In short, investors who are risk averse and want exposure to government securities may show interest in gilt funds.

how to invest in Gilt funds

Investing in a Gilt fund involves various crucial steps. Investors may understand the importance of these steps to make wise investment decisions.

1. Determine your investment Goal

The first step is to determine your investment goal such as wealth creation, retirement planning, child’s education etc. It will help you not choose the wrong gilt mutual fund.

2. research & compare different Gilt funds

After you have a clear investment objective, you can filter out relevant mutual funds & avoid irrelevant ones. Among the list of relevant funds, you must compare them and choose the best fit for you.

You should also decide on your investment mode, amount & frequency while selecting mutual funds.

Further reading: How to choose the best Mutual fund

3. Open Investment Account

If you do not have an investment account, you can open it with a mutual fund company of your choice or any online investment platform that offers the fund of your choice.

Further Reading: How to Open a Mutual Fund Investment Account

4. Start Investments & track performance

With opening an account, you can start investing but it is essential to track the fund’s performance. This will help you understand if the fund is aligned with your investment goals. Also, you can make the required changes accordingly.


  1. Can I Buy Gilt Funds Directly?

    Yes, you can buy gilt funds directly from the fund houses.

  2. How Safe Are Gilt Funds?

    As Gilt funds primarily invest in government securities, they are considered low-risk or sometimes risk-free because the government is less likely to default on its promises.

  3. Can I Redeem My Investment In Gilt Funds Before Maturity?

    As you know gilt funds offer good liquidity, you can redeem your investment before maturity. However, it may attract some charges.

  4. Do gilt funds have an SIP option?

    Yes, most gilt funds have SIP as well as a lump sum option for investment.

A commerce graduate turned a digital creator to follow his passion for writing and sharing useful & well-researched information that adds some value to people's lives.

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