Gilt Fund Returns In India: Are They Worth It In A Volatile Market?
Indian investors often seek investment avenues that offer higher returns than traditional bank deposits, without exposing their capital to excessive risk. Gilt funds emerge as a reliable option, providing a blend of safety and steady returns by investing predominantly in government securities.
Typically issued by the Government. Gilt funds are considered one of the safest investment instruments, as they invest at least 80% of their money in Government Securities and State Development Loans1. But is it still a good investment in 2025, especially with various other options available?
Let us understand in detail what gilt funds are and what factors influence gilt fund returns.
What Are Gilt Funds?
Gilt funds are a type of mutual fund that primarily invests in government securities such as bonds. To raise capital, the government issues these bonds to the public and pays a fixed interest rate at regular intervals until maturity. As they are backed by the government, gilt funds carry minimal credit risk, making them a preferred choice for conservative investors seeking safety and stability in their portfolio
Common benchmark indices for gilt funds are the CRISIL 10-year Gilt Index and the Nifty All Duration G-Sec Index2. Compared to other equity and debt funds, these funds have a very low default risk because the government issues them. These are medium to long-term duration funds with portfolio maturity between three and 20 years3.
What Influences Gilt Fund Returns?
While gilt funds are considered one of the risk-free investment options in India in terms of credit, since they invest in sovereign bonds, their returns are highly sensitive to interest rate movements.
Here are the key factors that affect gilt funds returns:
1. Interest Rates: Interest rates and gilt fund prices are inversely related. Let us say, if the interest rate drops from 7% to 6%, the value of existing government bonds increases, boosting the NAV of gilt funds. So, when rates fall, investors holding older, higher-yielding bonds benefit from capital gains.
2. RBI Policies: The Reserve Bank of India (RBI) influences bond markets through its monetary policy, especially repo rate changes. For instance, if the RBI reduces the repo rate from 25 basis points to stimulate the economy, bond yields typically fall, increasing gilt fund prices. RBI rate cuts are usually good news for gilt fund investors.
3. Inflation: Higher inflation often leads the RBI to raise interest rates to control price levels. For example, if inflation is projected to rise from 5% to 6.5%, the RBI may hike rates, causing bond prices to drop. This drop lowers the value of gilt funds.
4. Market Liquidity: In times of high liquidity, the demand for government bonds increases in such times. This demand may push up bond prices, providing stable returns. Conversely, when liquidity tightens, such as during aggressive rate hikes, returns may dip.
Gilt Fund Performance: Past vs Present
How have gilt mutual funds returns held up over time?
Here is a look at the top 5 gilt funds in India, based on 3-year and 5-year CAGR (as of June 2025)
Based on 3-year CAGR
Fund Name | 3Y CAGR (%) |
| ICICI Prudential Gilt Fund | 9.23% |
| Axis Gilt Fund | 9.22% |
| Tata Gilt Securities Fund | 9.11% |
| Baroda BNP Paribas Gilt Fund | 8.99% |
| DSP Gilt Fund | 8.90% |
Based on 5-year CAGR
Fund Name | 5Y CAGR (%) |
| ICICI Prudential Gilt Fund | 7.01% |
| Edelweiss Government Securities Fund | 6.89% |
| SBI Magnum Gilt Fund | 6.62% |
| Axis Gilt Fund | 6.60% |
| DSP Gilt Fund | 6.55% |
Advantages And Risks Of Gilt Funds For Retail Investors In India
Every financial market instrument has its own advantages and disadvantages. Although gilt funds are safer yet there are some points to look out for:
Who Should Invest In Gilt Funds?
Like mentioned above, Gilt funds are one of the best choices for conservative investors looking for risk-free investment options in India with better returns. These carry minimal credit risk. While gilt funds have the potential to offer better returns than traditional options like fixed deposits or savings accounts, their performance can fluctuate in the short term due to interest rate movements. However, with a medium- to long-term investment horizon, they may provide more stable returns.
Gilt funds also help in portfolio diversification, with balance during equity market volatility, and act as a safe investment option during economic uncertainty. The gilt fund risk and returns equation becomes favorable with the right mindset, patience, and proper timing.
Liquidity and Taxation in Gilt Funds: Key Considerations for Investors
Liquidity:
Gilt funds are open-ended, which means you can buy or sell units anytime based on the NAV (Net Asset Value). However, if you withdraw your money when interest rates are rising, you might get lower returns. Some funds may also charge a small exit load if you redeem in a short period. Unlike Fixed Deposits or Public Provident Funds, returns are market-linked and move as per the market volatility.
Gilt Fund Taxation:
For the FY 2024-25, Gilt Funds are classified as “Specified Mutual Funds” under section 50AA of the Income Tax Act.
Consequently, any profit earned from redemption or transfer of such units, if acquired on or after 1 April 2023, shall invariably be treated as short-term capital gains regardless of the duration of holding4. These gains are taxable at the applicable tax slab rate for resident individuals. The concept of long-term capital gains ceases to apply in this scenario, since all gains from specified mutual funds are treated as short-term.
Further, there is no TDS, Tax Deducted at Source, deductible on capital gains for residents. However dividend payouts attract 10% TDS, yet if total dividend stays within INR 5000 in a year, no deduction applies. Tax and TDS are subject to surcharge and health and education cess at the rate of 4%.
Conclusion
Gilt funds in India offer a compelling mix of safety, stability, and the potential for higher returns compared to traditional fixed deposits. Backed by government securities and managed by professionals, they are well-suited for conservative investors who want low credit risk and are willing to navigate interest rate movements. If you're building a long-term fixed-income portfolio, gilt mutual funds can be a smart addition, especially when interest rates are expected to decline.
Explore curated debt mutual funds and other fixed-income investment options on Grip Invest to diversify your portfolio with confidence.
FAQs On Gilt Fund Returns
1. What is the average return of a gilt fund?
Over the past five years, average returns have been around 6% to 7% per year. But it can fluctuate as per the market conditions and interest rate changes.
2. How risky are gilt funds in India?
Since they make investments in government securities, they are considered more secure than corporate bond funds. But they are not risk-free. When interest rates rise, the value of your investment can drop.
3. Should I invest in gilt funds during high inflation?
RBI increases rates when inflation is high. This can lower gilt fund prices. It might be better to invest after rates have peaked. If you still want to invest during high inflation, consider a Systematic Investment Plan (SIP) to spread out the risk.
References:
1. Mutual Fund Sahi Hai, accessed from: https://www.mutualfundssahihai.com/en/what-gilt-mutual-funds
2. Association Of Mutual Fund In India, accessed from: https://www.amfiindia.com/research-information/other-data/listofbenchmarkindices
3. Association Of Mutual Fund In India, accessed from: https://www.amfiindia.com/investor-corner/knowledge-center/debt-fund.html
4. Association Of Mutual Fund In India, accessed from: https://www.amfiindia.com/investor-corner/knowledge-center/tax-corner.html
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