Sharekhan Blog

What is Gilt Funds?

  • Apr 17, 2024

This guide offers a comprehensive overview of gilt funds - what they are, their advantages, who they suit best, the different types available, and crucially, how to invest in them successfully.

Understanding Gilt Funds

As per gilt fund meaning, they are mutual funds that invest primarily in government securities. These securities, also known as gilts, are debt instruments issued by the government to finance its fiscal deficits. They come with a promise of repayment upon maturity and periodic interest payments, making them a comparatively safe investment choice. Gilt funds aim to offer returns through investments in these secure government bonds.

The Appeal of Gilt Funds

Safety First: The cornerstone of gilt funds' appeal lies in their safety. Being backed by the government, the risk of default is virtually nonexistent. This makes gilt funds an attractive option for conservative investors prioritizing capital preservation.

Income Generation: Through regular interest payments from government securities, gilt funds provide a steady income stream. This feature particularly appeals to those seeking predictable returns, such as retirees.

Portfolio Diversification: Adding gilt funds to your investment mix can enhance portfolio diversification, reducing overall risk. Their low correlation with equities and corporate bonds helps in stabilizing portfolio returns during market volatility.

Evaluating the Risks

While gilt funds are relatively safe, they are not entirely risk-free. The primary risk associated with gilt funds is interest rate risk. Since bond prices and interest rates have an inverse relationship, rising interest rates can decrease the fund's net asset value (NAV), affecting returns. Hence, understanding the current interest rate environment is crucial before investing in gilt funds.

Interest Rate Sensitivity

The impact of interest rate changes on gilt funds varies based on the maturity profile of the bonds in the portfolio. Long-term gilts are more sensitive to interest rate fluctuations compared to short-term gilts. Therefore, the fund's duration—a measure of sensitivity to interest rate changes—should be considered when making investment decisions.

How to Invest in Gilt Funds?

Investing in the best gilt funds, which are mutual funds primarily in government securities, can be a prudent way to diversify your investment portfolio while aiming for steady returns. Here are the steps to follow:

1. Assess Your Risk Tolerance: Begin by evaluating your risk appetite. If capital preservation is your goal and you are cautious about market volatility, gilt funds could be a suitable choice.

2. Understand Your Investment Horizon: Consider your investment horizon. Gilt funds are more suited for medium to long-term horizons, especially given their sensitivity to interest rate movements.

3. Choose the Right Fund: Research and compare different gilt funds based on their past performance, fund manager's track record, and investment strategy. Remember, past performance does not indicate future results, but it can provide insights into how the fund navigates market conditions.

4. Stay Informed: Keep abreast of economic developments, especially those related to interest rates and fiscal policies, as these can significantly impact gilt fund returns.

Taxation of Gilt Funds

For taxation purposes, gilt funds are treated like debt mutual funds. Short-term capital gains (if the investment is sold within three years) are taxed as per the individual's income tax slab. Long-term capital gains (on investments held for more than three years) are taxed at 20% with indexation benefits, which adjust the purchase price for inflation, thereby potentially reducing the taxable gain.

Gilt Funds Invest in Your Portfolio

Incorporating best gilts to buy into your investment portfolio can offer several benefits. They are precious for risk-averse investors looking for stable returns and those seeking to balance out the riskier components of their portfolio. However, aligning gilt fund investments with your financial goals, investment horizon, and risk tolerance is essential.

Gilt funds present a viable investment option for those seeking safety and steady income, with the added advantage of government backing. However, like any investment, they come with considerations, particularly regarding interest rate risk. By carefully evaluating these factors and how gilt funds align with your investment strategy, you can make informed decisions that enhance your portfolio's resilience and growth potential.


Gilt funds can be crucial in a well-rounded investment portfolio, offering a blend of security, income, and diversification. As always, consider seeking advice from financial advisors to tailor investments to your unique financial situation and goals. Through informed decision-making and strategic planning, gilt funds can contribute to achieving your long-term financial objectives, embodying the principle that knowledge truly is power in the realm of investing.

Team Sharekhan
by Team Sharekhan

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