What are Gilt Funds?

Gilt-FundsGilt Funds are those funds of debts that invest 80% of their investments in securities of government. For issuance of golden-edged certificates, these government securities or bonds can be used. The Gilt originated from the nickname of gilded edge certificates. As per SEBI norms, gilts funds must invest at least 80 per cent of their funds or assets in government securities.
Gilt funds are of two types:

  • One gilt fund invests mostly their assets in government securities across maturities while
  • Another gilt fund comes with 10 years of constant maturity – these funds have to invest their assets at least 80 per cent in government securities with 10 years of maturity period.

It should be kept in mind due to making an investment of these funds in government securities, these schemes come with zero default risk. Though, their interest rate risk is very high, which investors need to be aware of before investing. Generally, the interest rate tone in the economy and the money market is set by government securities. The 10-year government’s most traded security works as a benchmark. Yield movement of these securities set trading tones in the bonds market. For instance, traders constantly look for opportunities to trade based on the difference of the spread or interest rate between 10-year bonds or government bonds and corporate bonds or other government bonds.
Most fund managers do not recommend the gilt funds to their regular clients due to the volatility. They consider investors with much awareness about the money or bond market should invest in these fund schemes. Entry time and exit time is very crucial in these schemes due to sensitive interest rate movements. Investors benefit most in a falling interest rate regime but it can start giving negative returns if the rates start to harden.
When there was a reduction in rates by RBI, the government securities demand went up because of carrying a higher interest rate. When demands are up, prices become high and yields fall. This is called the inverse relationship between the price and bonds yield. This turns upside down when RBI pauses on rates or hike policy rates. Since new bonds will carry a higher rate of interest, investors start selling their old bonds hence fall in demand for old bonds. This results in a drop in the price of older bonds and yields going up.
As mentioned earlier, a falling rate of interest regime is good for gilt funds. In tandem with the bonds price, the NAV of the gilt fund’s scheme goes up. The sole reason for the good performance of Gilt funds in the last one year after reduction in rates by RBI.


Only consider investing in Gilt Funds if you can track movements in an interest rate and entry and exit points in these schemes. Always keep in mind their extremely sensitive movements of interest rate in the economy – meaning gilt fund scheme start seeing going up or down totally depending upon the outlook of the interest rate. The RBI action might come after.

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