Gilt Funds A Complete Guide 2025
The gilt funds, one of the investment avenues into India that is widely used in the fixed income, has been a trend of attracting the attention of investors in their search of security and consistent returns over the last few years. As the economic conditions continue to become uncertain, interest rates go up and down and government borrowing programmes change, more Indian investors are re-examining their portfolio decisions to 2025 and scrutinizing debt mutual fund categories- especially gilt funds.
But what are gilt funds and why are they gaining popularity and who now needs to consider investing in gilt funds? This paper gives a detailed summary, their characteristics, advantages, and disadvantages, taxation, current trends, and a current guide depending on requirements of an Indian retail saver and wealth builder.
What are Gilt Funds and How do they work?
Gilt funds are a kind of debt mutual funds where the securities of the government are their main investment which are also called gilt. These are bonds or fixed-income securities that are issued by the Government of India or state government to borrow in order to finance different developmental practices. These securities are backed by sovereign security hence their credit risk is insignificant as compared to other debt funds.
In investing in a gilt fund, the fund manager invests in a combination of short, medium, or long-term government bonds. These are regular periodic interest payment securities whose prices can increase or decrease according to fluctuations in the rates of interest and demand in the market.
A good number of investors in the year 2025 are seeking safe investment options that would also provide decent returns. As Indian 10-year G-Sec yields are holding a range of between 7.0-7.3 percent early in 2025, gilt funds are once again in the limelight as the possible substitute to the conventional bank FDs and savings products.
Did you know? The gilt was derived out of gilt-edged that denoted the gold edges on original British government bonds- meaning high quality and security.
People Also Ask
How is gilt different to other debt funds?
Gilt funds will not invest in corporate bonds with different credit risks other than government securities.
Why are Gilt Funds On the Rise among Investors in 2025?
The revived interest in gilt funds in 2025 can be attributed to the following reasons:
- Reserved Bank of India (RBI) is likely to continue with the constant to slightly falling interest rate regime to the first half of 2025.
- The increased risk aversion by investors due to rising market volatility and global uncertainties after the 2024 elections is emerging.
- The government-supported funds have become comparatively attractive with revised taxation on long-term capital gains on some debt mutual funds.
- The increase or decrease in the repo rate cycles is causing investors to reconsider bond funds as capital gain.
This fresh momentum is evident in the recent 12 months inflows. According to the recent SEBI report (Q1 2025), gilt funds registered more than [?]4,500 crore net inflows- a great improvement in comparison with the previous years.
The Major Characteristics and attractions of Gilt Funds
- Safety: Only invests in central government and state government securities that are guaranteed by sovereign.
- Interest Rate Sensitivity: the returns are guided by fluctuations in the government bond yields and the RBI policies.
- None of the risks of Default: All investments are in government instruments, and hence zero credit risk is realized in fact.
- In Two Forms: Most funds have an investment of a combination of maturities, but others (also known as Gilt with 10 Years Constant Duration) are mostly invested in 10-year G-Secs.
- Regular Liquidity: This can be sold or purchased on any working day just as it is to any other mutual fund.
- Low Expense Ratio: Typically less than credit risk funds or dynamic bond funds.
People Also Ask
Are gilt funds safe in India?
Yes, since they invest in government bonds only, then they are regarded as the safest mutual funds to be invested in by retail investors.
The Way Gilt Funds Bring Returns
Gilt funds generate returns that are of two types:
- Interest Income: Govt. pays periodic coupon interest on the government bonds that it holds.
- Capital Gains: This will be in case market interest rates are low and the older and higher yielding bonds will increase in value resulting in appropriation of capital gains to the fund.
The investment of these funds is closely connected with the dynamics of interest rates in India. As an example, in 2020-2021, with RBI reducing rates drastically, gilt funds provided investors with double-digit returns. In contrast, an environment of increasing rates (like in 2023) resulted in a moderate or even flat performance of the returns because of losses in mark-to-market.
Expert Insight
Investors should not forget that gilt funds are not entirely risk-free. These have no default risk but they are subject to interest rate risk. Bond prices decline when the rates increase and this will impact returns.
– Arvind Mathur, Mumbai, Senior Fixed Income Analyst.
Should Gilt Funds be on the Radar of Who in 2025?
In the given environment, the gilt funds can fit the following investor profiles:
- Risk-averse Investors: These are those investors who wish to avoid risk in corporate bonds or downgrade in credit rating.
- Long-term/Medium Horizon: It suits investment horizons of three years or more to sail through the interest rates cycles.
- Portfolio Diversification: Investors seeking a secure, predictable anchor to their basic fixed income portfolio.
- Goal-Oriented Investors: individuals invested in particular goals that are time based and include schooling the child, purchasing a house or even planning far off retirement.
People Also Ask
Is gilt fund better than FD?
Gilt funds can have superior post tax returns in the long term, but may vary in the short run in terms of NAV. Bank FDs provide fixed returns but could have lower after tax yields to people in the high tax bracket.
What are the Pros and Cons of Gilt Funds?
It is important to learn the practical advantages and dangers of investing into any financial product. Here’s a balanced view:
Pros
- Extremely high safety as guaranteed by sovereignty.
- Periodic and relatively liquid, easy entry and exit.
- Reduced cost of a share compared to certain debt funds.
- Possibility of increasing capital gains in the event of lowering the interest rates.
- Appropriate to the conservative investors who need stability.
Cons
- Exposed to interest rate risk, and thus short-term mark-to-market losses can occur in case the market rates go up.
- No hedging against inflation risk in case the price increase is greater than the fixed returns.
- The returns are not guaranteed or fixed as in the case of FDs.
- Average returns just a little below high yield or credit risk funds in bullish debt markets.
Did you know?
By the year 2024, Gilt Funds had an average 1-year yield of about 7.4 percent and some credit risk funds were over 8.3 percent, but with very high credit risk[1].
What are the Various kinds of Gilt funds in India
Nowadays, two major classes exist:
- Regular Gilt Funds: Invests in varying maturities according to the opinion of fund manager. The period can be actively different.
- Gilt with 10-Year Constant Duration: Will only invest in government securities with remaining maturity of 10 years keeping the portfolio average nearly at 10 years.
Numerous new fund offers (NFOs) have been launched in late 2024 and early 2025 as a result of increasing demand by HNIs and institutional investors to be able to obtain a specific exposure to the 10-year yield of a bond.
Comparison Table: Gilt Funds vs. Other popular debt funds (2025 data)
| Fund Type | 1Y average return | Credit Risk | Interest rate risk | Normal expense ratio |
|---|---|---|---|---|
| Gilt Funds | 7.2% | Very Low | High | 0.50% |
| Banking and PSU Debt Fund | 7.1% | Low | Low mediocre | 0.55% |
| Corporate Bond Fund | 7.3% | Moderate | Moderate | 0.60% |
| Credit Risk Fund | 8.0% | High | Moderate | 0.75% |
| Liquid Fund | 6.0% | Low | Low | 0.20% |
People Also Ask
Should I invest on gilt funds or short duration funds?
Short-duration funds are less interest rate sensitive but they might carry a low level of credit risk. Gilt funds are less risky, but they may experience greater changes in NAV.
Gilt Funds taxation in 2025
Taxation has changed post-2023. Investment in debt mutual funds such as gilt funds invested at any time is subject to taxation at the rate of income tax of individual in the short term category of capital gains in the event of purchase after 1 April 2023.
Key points:
- The profits are included in your taxable income and taxed.
- No indexation advantages that can be obtained on gilt funds purchased after April 2023.
- The income is added to the dividend payouts (where applicable) and taxed under slab.
- Old LTCG rules with indexation to the funds obtained prior to April 2023 and kept over 3 years.
Expert Insight
In the new tax law, it does not give indexation benefit holding gilt funds over a long period of time. But to individuals with lower tax bracket, such funds are still considered safe and guarantee decent returns.
– Nisha Gupta, registered RIA, SEBI, Pune.
People Also Ask
How much is the least amount to invest in the gilt funds?
SIPs are from [?]500/month on most leading AMCs and the lump sum begins at [?]1000.
What are the ways to select the best Gilt Fund in India in 2025?
Although gilt funds are all the ones that invest in government bonds, they may vary in terms of returns and risk properties depending on:
- Duration of portfolio: The longer the duration the more it is exposed to interest rate movement.
- AUM size and liquidity: Funds that have more assets are able to accommodate redemptions.
- Expert ratio: Reduced expenses assist to boost net returns.
- Past performance: Review Check 1Y, 3Y and 5Y CAGR but do not rely solely on historical data.
- Fund manager: Years of experience and experience in dealing with fixed income instruments.
Some of the popular ones in 2025 are HDFC Gilt Fund, SBI Magnum Gilt Fund, ICICI Prudential Gilt Fund and Nippon India Gilt Securities Fund.
When to Invest in Gilt Funds the Right Time?
Gilt funds are applicable in the following scenarios:
- In cases where the interest rates in the economy are high with a tendency to go down resulting in capital gains.
- To investors who can afford 3-5 year wait time regardless of rate cycles to remain on the roller coaster.
- In case of the need to rebalance portfolio in favor of safety in the event of economic or geopolitical uncertainty.
- In cases where the FDs and small saving rates are unfavorable as compared to the sovereign bond yields.
There is no need to have to do the market right–long term investors generally gain by having a frequent SIP and holding fast.
People Also Ask
Is it possible that gilt funds have negative returns?
Yes, during times of increasing interest rates or other sudden rises the NAVs fall in the short term, through MTM losses, but no danger to the principal at default.
Did you know?
Some gilt funds gave negative returns on 3-month in Q2 2023 as RBI sharply increased rates, but made it back later with good YTD returns as the market cooled.
What are the ways to invest in Gilt Funds in India now?
It is easy to invest in gilt funds:
- Select an AMC with mutual funds via aggregators or mobile applications that is registered by SEBI.
- Lump-sum or SIP mode, depending on cash flow and duration of investment.
- Full e-KYC not yet done.
- Check performance after every quarter and re-balance.
- The majority of sites enable investment without paperwork and quick redemption where money is deposited within 1-2 working days.
Should Gilt Funds be used in Retirement Planning or Emergency Corpus?
Gilt funds can also serve a helpful purpose in exemption planning as well as the development of an emergency corpus, in particular to the moderate-to-conservative investor. Their long-term viability and capacity to achieve returns that are above the rate of inflation makes them suitable to long-term objectives.
Nevertheless, in case of complete emergency of liquid (where capital could not fall) liquid funds or overnight funds can be more appropriate because they tend to have minimal price change.
Expert Insight
- An emergency corpus of liquid funds and gilt funds is a mix of both liquid funds and gilt funds which balances liquidity and the potential of returns to most urban Indian families.
- My experience in the field of finance has truly been enriching, particularly as I have developed multiple skills essential for achieving success in my career.
- The field of finance is one area that has enriched me a lot, especially because I have been able to acquire several skills that are necessary in ensuring that I succeed in my career.
People Also Ask
What is the time span of a gilt fund?
It should be held at least 3-5 years in order to take advantage of interest rate cycles and maximise average returns.
Quick Recap
- Gilt funds only invest in government securities, which provide high safety with an interest rate risk.
- Appropriate as a core fixed income allocation with moderate returns to risk-averse investors to hold.
- Imposed at a slab rate in case of purchase after April 2023–unchindexed.
- Compounding and volatility management Ideal holding period 3 years or longer.
- Compare the funds according to the expense ratio, AUM and consistency in 3-5 years.
- SIPs have low beginnings as low as [?]500 per month- flexible and easy to initiate.
People also Ask Frequently Asked Questions
Q1: Gilt funds are superior to PPF?
A1: Public Provident Fund (PPF) is a fixed rate with EEE tax advantages whereas gilt funds are market-based with easy withdrawal with taxation on a slab basis. Select depending on the liquidity requirement as well as the tax status.
Q2: Do gilt funds give you the opportunity to lose money?
A2: In the short-term, there is a risk of short-term losses because of interest rate risk, but in the long-term: unless you redeem during a recession, there are minimal risks of incurring a loss of principal over 3 or more years.
Q3: Which is better between SIP or lump sum in gilt funds?
A3: The SIP tend to be more appropriate in dealing with interest rate volatility. Lump sum can do well in case you anticipate that there is a decrease in rates in the near future.
Q4: How long is the lock-in period of gilt funds?
A4: Lock-in period does not exist; any time that one is redeemed. Nevertheless, certain AMCs can possess exit loads that are of less than a certain period.
Q5: What are the most performing gilt funds in 2025?
A5: SBI Magnum Gilt is the top ranking options according to recent 3 years CAGR and AUM; HDFC Gilt, ICICI Prudential Gilt, and Axis Gilt Funds are the top ranking ones.
Q6: Are gilt funds monthly income generating?
A6: Gilt funds do not provide monthly income but may provide options of dividends based on the performance of the market.
Q7: Is it secure to invest in gilt funds via the Internet?
A7: Yes, provided that it is through SEBI-registered AMC or the proven mutual fund system.
Sources:
- Value Research Online - valueresearchonline.com
- Securities Exchange Board of India (SEBI)
- Moneycontrol
- Mutual funds of India Association (AMFI)
- Reserve Bank of India (RBI)
