Gilt Funds: government bonds, zero credit risk

Gilt funds are debt mutual funds that must keep at least 80% of their money in government securities — bonds issued by the Government of India or state governments. Because the sovereign borrows in its own currency and can always service rupee debt, a gilt fund carries effectively zero credit risk: there is no company on the other side that can default. What it carries instead, in generous quantity, is interest-rate risk.

How interest rates move a gilt fund

Bond prices and market interest rates move in opposite directions. When the RBI cuts rates or bond yields fall, existing bonds paying older, higher coupons become more valuable, and gilt NAVs climb. When yields rise, those same bonds are suddenly less attractive and NAVs fall. The longer the maturity of the bonds a fund holds, the harder each move hits — a long-duration gilt fund can gain or lose 5–8% in a year purely from rate swings, which surprises investors who assumed "government bonds" meant "fixed-deposit-like calm". The sensitivity is measured by duration: a duration of 7 means roughly a 7% NAV move for every 1% change in yields.

A worked example

Suppose you invest ₹2,00,000 in a gilt fund whose portfolio yield is 7% and duration is 6. If yields fall by 1% over the next year, your return is roughly the 7% yield plus about 6% of price gain — near 13%. If yields instead rise by 1%, you earn roughly 7% minus 6% — about 1%. Same fund, same government bonds, wildly different outcomes. That is interest-rate risk in action, and it is why gilt funds are a view on rates, not a parking spot.

Who gilt funds suit

• Investors who expect rates to fall and want a clean, credit-risk-free way to benefit, with a 3–5 year horizon.
• Those who want sovereign safety in the debt part of a portfolio and can tolerate NAV swings on the way.
• Not ideal for short-term money — for that, look at liquid funds or ultra-short categories where duration is tiny.

Common mistakes

• Buying a gilt fund after a big rally in bonds, when much of the rate-cut story is already priced in.
• Confusing "no credit risk" with "no risk" — the NAV is not fixed and can fall for months when yields grind up.
• Ignoring taxation: gilt funds follow debt-fund rules, so gains are added to your income and taxed at your slab rate for units bought on or after 1 April 2023.

Takeaway: gilt funds give you the government's balance sheet and the bond market's mood swings. Use them deliberately, when you have a rate view and the patience to see it through — not as a default "safe" fund. Mutual fund investments are subject to market risks; read all scheme documents carefully.

→ Find gilt funds in the screener, or brush up on interest-rate risk first.