Gilt Mutual Funds: List of Best Gilt Funds, Risk and Returns

7 min read • Published 28 October 2022
Written by Animesh Gupta
Here’s all you need to know to invest in top gilt mutual funds

With a steady rise in mutual fund investors in India year after year, the total number of accounts (or folios) as on September 30, 2022 stood at 13.81 crore (138.1 million). However, people often have multiple doubts and questions about different types of Mutual Funds. 

In this blog, we will discuss gilt mutual funds that many investors consider to be one of the safest investment options. Government bonds that commonwealth countries such as India, the UK, and Australia issue are known as gilt. Since, before Independence, these government bond certificates had a gold lining around the edge of the paper, called gilding. 

Keep reading to learn more about the top-performing guilt mutual funds you can invest in! 

What Is a Gilt Mutual Fund?

A gilt fund invests in government securities issued by the Central and State Governments. Because the government is the issuer of the debt instruments, these funds are generally free of default risk. As per SEBI, a gilt fund is an open-ended mutual fund scheme in which 80% of its corpus is invested only in government securities. 

Moreover, these funds invest in gilts with short and long maturities. Therefore, gilt funds carry a significant interest rate risk depending on their maturity profile. There are two types of gilt funds- 

  • 10-year constant duration funds 
  • Gilt funds that invest in G-secs across different maturities.

While gilt funds do not carry credit risks, they are very susceptible to changes in interest rates.

List of Top Gilt Mutual Funds

Name of the Gilt Mutual Fund5-Year Annualised Returns 
Edelweiss Government Securities Fund – Direct Plan-Growth7.88%
DSP Government Securities Fund – Direct Plan-Growth7.57%
SBI Magnum Gilt Fund – Direct Plan-Growth7.22%
LIC MF Government Securities Fund – Direct Plan-Growth6.80%
Kotak Gilt – Investment – Direct Plan-Growth7.28%
ICICI Prudential Gilt Fund – Direct Plan-Growth7.39%
Axis Gilt Fund – Direct Plan-Growth6.94%
PGIM India Gilt Fund – Direct Plan-Growth6.39%
UTI Gilt Fund – Direct Plan-Growth6.27%
Invesco India Gilt Fund – Direct Plan-Growth5.35%
*Based on NAV and Returns data issued on October 6, 2022

How Do Gilt Mutual Funds Work?

To invest in the best gilt mutual funds, you need to understand how these mutual funds work. 

Gilt mutual funds are a type of debt fund which invests in securities that directly lend to the government. The government, like corporations, requires money for various purposes like constructing a new highway or starting a society. To get funds for such projects, the government will approach the Reserve Bank of India.

The RBI lends the necessary funds to the government after it borrows funds from other banks or insurance companies. Finally, it will issue Government Securities or Treasury Bills to investors with a fixed tenure.

Gilt funds subscribe to these securities and receive a payout once they mature. Historically it has been observed that these funds have negligible risk of non-payment of principal amount and interest. However, interest rate movements affect the returns of these schemes inversely. When interest rates rise, prices of government securities fall and this has a direct impact on the fund’s performance.

What Are the Benefits of Gilt Mutual Funds?

The benefits of investing in a gilt mutual fund are:

  • Investors who tend to be wary about risk should invest in gilt funds as they have relatively minimal default risk levels attached to them.
  • Gilt funds give moderate risk-free returns in the medium to long term.
  • The gilt fund returns are more consistent and dependable than other debt funds.
  • Government securities are far more liquid than any corporate bonds due to their high demand.

Who Should Invest in Gilt Mutual Funds?

  • These funds are a good option for those looking for capital preservation and earning moderate returns.
  • Gilt funds are a risk-averse investment option because they only invest in fixed-income securities, which the State Governments and the Central Government issue. As a result, the returns these funds provide are more predictable and steadier when compared to other debt mutual funds. 
  • If you are looking to venture into debt investments, gilt funds can be a good place to start. Since the underlying securities are less volatile and carry sovereign guarantee, it will help you in building confidence over time. 

Taxability of Gilt Mutual Funds?

Gilt funds are taxed just like any other debt funds in the market. The dividend these funds generate is added to an investor’s total income and taxed at their tax slab rate. Furthermore, we have highlighted the taxation of STCG and LTCG below:

Capital GainsHolding Period Taxation 
Short-Term Capital Gains Less than three years or 36 monthsTaxes charged as per the investor’s tax slab rate 
Long-Term Capital Gains More than three years Taxation is done at a flat 20% rate, including indexation benefits. 

Things You Should Remember before Investing in Gilt Mutual Funds

Risk levels- Due to the absence of credit risk, gilt funds are more liquid instruments than corporate bond funds. However, interest rate risk is the main problem for gilt funds. When the market interest rates go up, the fund’s NAV (net asset value) falls precipitously.

Financial goals- If you are one of those investors aiming for medium to long-term wealth growth, you should consider investing in gilt funds to take advantage of interest rate volatility. 

Returns- Gilt debt funds have the potential to produce decent returns. However, like any other MF gilt funds do not provide guaranteed returns and are erratic due to general interest rate shifts. Therefore, while interest rates are declining, it is a good idea to invest in these funds. 

Investment horizon- Typically, these funds invest their total corpus mostly in government assets with medium to long term maturity periods. The portfolio of these funds generally ranges from 3 to 5 years. 

Cost- To cover the fund manager’s fee and other associated costs, gilt funds charge a yearly fee which the fund houses call an expense ratio. The maximum expense ratio for debt funds is 2%, per SEBI guidelines. However, this charge may vary from fund manager to fund manager.

Final Word

If you plan to invest in one of the top-performing gilt mutual funds in India, you need to first analyse the funds from your perspective. You should pick an investment based on your risk appetite, the financial goals you want to achieve, and your financial savings at that moment. Always remember to analyse the funds from quantitative and qualitative parameters before investing.

FAQs about Gilt Mutual funds

Can gift funds replace PPF?

Gilt funds cannot replace PPF (Public Provident Fund) for higher returns. A gilt fund may have the potential to outperform PPF over a long tenure. However, as an investor, you should not invest in gilt funds or, for that matter, any other fund as an alternative to PPF.

What is a constant maturity gilt fund?

Constant maturity gilt funds invest in various government bonds with a 10-year average maturity tenure.. It approaches government bonds in a more passive manner than conventional gilt funds, eliminating the possibility of incorrect calls.

Can NRIs invest in gilt funds?

Theoretically, NRIs can invest in gilt funds. However, they should carefully consider the taxation rule that applies to them and check how it affects their profits. For example, an NRI living in the USA investing in gilt funds in India may not receive the same returns as an Indian investor.

How are corporate bonds different from gilts?

When a big corporation needs money for operations, it borrows money from investors and issues them corporate bonds. Corporate bonds tend to offer higher returns than government securities but are also accompanied by greater credit risk. Corporate Bonds with more credit risks offer higher returns to compensate for it.

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Animesh Gupta

Credit Principal
Animesh Gupta is a Chartered Accountant by profession and a NISM certified Mutual Fund Expert. He has over 5+ years of experience working in the Financial Services Industry. In his role at Wintwealth, he is part of the Credit and Risk team and evaluates the risk of the bonds available on Wintwealth's platform.

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