Best Gilt Funds Sorted by Last 3 Year Returns
About Gilt Mutual Funds
- Investors can have two major investment objectives – capital appreciation and capital preservation. While capital appreciation comes with high risks, capital preservation comes with relatively lower risks. Gilt mutual funds are suitable options for those looking for capital preservation.
- Gilt funds are a type of debt fund that is considered to have the lowest risk among other mutual funds. This is because they only invest in bonds and fixed-interest securities issued by the Central and State Governments. The underlying securities have varying interest/coupon rates and maturities. As per the Securities and Exchange Board of India (SEBI) mandate, gilt mutual funds have to invest at least 80% of their pooled money in government securities. In contrast, the remaining can be invested in other types of bonds.
How do Gilt Funds Work?
When the government needs financial resources, it turns to the highest financial authority in the country, the Reserve Bank of India (RBI), which also serves as the government’s financial institution. The RBI acquires the necessary funds by collecting money from various sources, including banks and insurance companies, and then extends loans to state and central governments.
In return for these loans, the RBI issues government securities known as G-secs, which come with a fixed time frame. These G-secs are then subscribed to by Gilt Funds, financial entities that specialise in investing in such government securities. When these securities reach their maturity date, the Gilt Fund returns them and receives a corresponding payout.
For more risk-averse investors, Gilt Funds represents an attractive investment option, offering a balanced combination of reasonable returns and minimal exposure to financial risks. However, it’s essential to be aware that Gilt Funds are influenced by fluctuations in interest rates.
Features of a Gilt Mutual Fund
- Market volatility: Since gilt funds are required to invest at least 80% of the fund in G-secs and lack in equity exposure, they are free from the impacts of market volatility.
- Interest rate regime: Although these funds are free from market risks, they are prone to the risks of changing interest rates. The NAV of a gilt fund is inversely proportional to rising interest rates. Gilt funds are known to offer better returns when the interest rates are on a falling spree than when they are rising.
- Returns: Gilt fund returns are not guaranteed as they depend on interest rate changes, which is noteworthy as the government typically borrows for a longer duration. However, they can offer 10-15% returns in a falling interest rate regime.
- Expense ratio: As with all other mutual funds, gilt funds also charge a fee called expense ratio towards fund management. This fee is charged annually, decreasing your returns to that extent.
- Maturity: Gilt funds come with short-to-medium and long investment horizons. You can choose to invest in a fund with a suitable maturity.
Advantages of Investing in Gilt Mutual Funds
- Low to no credit risk: Since gilt funds invest majorly in government securities, the associated credit risk is almost nil as the government rarely defaults on repayment. This means your returns are close to stable.
- No market risk: Compared to equity and hybrid funds, gilt funds have significantly lower risks as they don’t have equity exposure.
- Moderate but almost stable returns: As the risk-reward rule goes, gilt funds offer relatively lower returns for low risk. However, their returns are mostly higher than most fixed-income investments like Fixed Deposits (FD) and Recurring Deposits (RD).
- Access to exclusive G-Secs: Not all government securities are accessible for retail investors; some are only available for institutional fund houses. However, you can invest in such exclusive securities by investing in gilt funds.
- Tax-efficient for high-income earners: For conservative investors falling under the higher-income bracket, gilt funds are more tax-efficient than fixed deposits.
Risks Involved in Gilt Mutual Funds
- Interest rate risk: Although gilt funds are devoid of credit and market risks, these are sensitive to the risk of changes in the interest rate. Generally, gilt funds tend to perform better in a falling interest rate regime than in a rising trend. Given that the government borrows for longer periods, the changes in interest rates impact the performance of these funds.
- Inflation risk: For the same reasons that government securities have a longer maturity period, gilt funds may not offer inflation-adjusted returns.
- Illiquidity: Gilt funds have a pre-fixed lock-in period, which makes them highly illiquid. Investors cannot exit these funds as per their wish. However, there are gilt funds with no lock-in period as well.
- Lower returns: As gilt funds are low-risk, they offer lower returns than equity and hybrid mutual funds. Further, returns also fluctuate in line with the changes in the repo rate.
- Incorrect entry and exit timing: Knowing when to enter and exit gilt funds is the key to earning profits. As a rule of thumb, these funds generate better returns during recessions. Therefore, entering such funds during a market boom may not be favourable.
Factors To Consider Before Investing in Gilt Mutual Funds
Gilt funds can provide stable returns and are considered relatively safe. However, a careful assessment of factors can help you pick a fund that suits your profile:
- Interest Rate Sensitivity: Gilt funds primarily invest in government securities, making them highly sensitive to interest rate changes. When rates rise, bond prices fall, affecting fund returns. Assess your tolerance for interest rate risk.
- Investment Horizon: Consider a longer investment horizon when opting for gilt funds, as they may experience short-term fluctuations. These funds are ideal for long-term goals.
- Credit Risk: Gilt funds are considered low-risk due to government backing. However, they can still have minimal credit risk, particularly in the case of state government bonds. Verify the fund’s credit quality.
- Expense Ratio: Lower expense ratios can enhance your returns over time. Compare fund expenses and opt for cost-effective options to maximise gains.
- Tax Efficiency: Gilt funds offer tax benefits on capital gains when held for more than 3 years. Understand the tax implications to optimise returns.
Who Should Invest in Gilt Funds?
- Conservative investors: Gilt funds are ideal for investors with a very low-risk tolerance because they don’t invest in high-risk investments like corporate bonds or stocks but only in government securities (G-secs).
- Investors looking for capital preservation and moderate returns: These are probably the best funds for investors whose only investment objective is the safety of their capital while earning moderate returns.
- Investors looking for short-to-long periods: Gilt mutual funds come in short- to medium-term and long-term variants. Therefore, investors can park their funds in a gilt fund in line with their preferred investment horizon.
- Investors looking for portfolio diversification: Those looking to diversify their portfolios by adding low-risk investments can invest in gilt funds.
- Investors looking for actively managed funds: Those looking to earn somewhat stable returns in the market but don’t have the time or knowledge to do so can opt for gilt funds, as the portfolio manager actively manages the funds on their behalf.
- Investors looking for assured returns during market downturns: Since gilt funds are known to perform well during a falling interest rate regime, investors looking to earn stable returns in a market downturn can consider these.
- High-income bracket investors: Gilt funds are more tax-efficient than fixed deposits in terms of taxation when it comes to investors falling in the higher-income bracket.
Taxability of Gilt Funds
Capital gains earned from gilt mutual funds attract taxes depending on the holding period:
- Returns from gilt fund units held for less than 3 years are treated as short-term capital gains. These are added to your annual income and taxed as per your income tax slab.
- Whereas returns on units held for more than 3 years qualify as long-term capital gains and are taxed at 20% with indexation.
When an investor earns dividends on their gilt mutual fund, the dividends are considered as a part of their taxable income. They are subject to taxation at the applicable rate based on their income tax bracket. Also, there is a 10% TDS on the dividend amount if it exceeds Rs. 5000 in a financial year.
How to Invest in Gilt Mutual Funds?
Investing in Gilt Mutual Funds through your Angel One account is a streamlined process that involves a few simple steps:
Step 1: Begin by logging in to your Angel One account using your registered mobile number. After logging in, validate the OTP (One-Time Password) for security purposes, and then enter your MPIN to access your account.
Please note that if you don’t have a Demat account with Angel One, you can open one quickly by completing the KYC (Know Your Customer) procedure and submitting the necessary documents.
Step 2: Once you’ve successfully logged in, it’s time to choose the most suitable mutual fund based on your financial needs and risk profile. You can evaluate various funds by navigating to the mutual fund section on the Angel One app. During this stage, consider the following factors:
- Search for the specific fund you wish to invest in or take recommendations from funds listed by Angel One across different categories.
- Analyse the fund’s historical performance, tax implications, constituent sectors, and the stocks it comprises.
- Utilise the provided calculator to estimate potential returns.
- Assess the level of risk associated with the fund and compare it to your risk tolerance.
- Check the fund’s ratings assigned by reputable rating agencies, typically on a scale from 1 to 5.
- Take note of the fund’s expense ratio, which provides insight into the cost of investing in it.
Step 3: After finalising the fund(s) you want to invest in, navigate to your Angel One account’s Mutual Funds section and search for your chosen fund. Since investing in mutual funds often involves a long-term commitment, exercise caution when selecting the fund(s) you intend to invest in. During this stage, consider the following:
- Decide whether you want to invest a lump sum amount or set up a monthly Systematic Investment Plan (SIP).
- Enter the investment amount you are comfortable with and choose your preferred payment method. UPI is the recommended mode, but you can also opt for net banking.
- After placing your order, if you’ve chosen the SIP investment route, you can establish a mandate for hassle-free future instalments.
Top 5 Gilt Mutual Funds
| Fund Name | AUM ( in ₹ crores) | CAGR 3Y (%) | Expense Ratio (%) | CAGR 5Y (%) |
| Edelweiss Government Securities Fund | 172.66 | 0.47 | 6.94 | 7.89 |
| ICICI Pru Gilt Fund | 6,780.56 | 0.56 | 7.57 | 7.86 |
| Kotak Gilt Fund-PF&Trust | 4,441.90 | 0.47 | 7.26 | 7.76 |
| DSP Gilt Fund | 1,781.58 | 0.57 | 7.33 | 7.76 |
| Kotak Gilt Fund(Q-IDCW) | 4,441.90 | 0.47 | 7.26 | 7.76 |
Note: The above-mentioned top funds are for informational purposes only and are not recommendations. The funds are based on a 5-yr CAGR as of January 8, 2025, which is subject to change frequently. Check out real-time data on Angel One.
Edelweiss Government Securities Fund
The Edelweiss Government Securities Fund has an AUM of ₹172.66 crore and is designed for conservative investors seeking stable returns through investments in government securities. With a 3-year CAGR of 6.94% and a 5-year CAGR of 7.89%, the fund ensures steady growth over the long term.
Its Sharpe ratio of 2.52 highlights strong risk-adjusted returns, while the average maturity of 21.7 years reflects its focus on long-duration securities. Managed by Edelweiss AMC, this fund is suitable for risk-averse investors looking for a safe haven with potential for moderate growth.
ICICI Pru Gilt Fund
The ICICI Pru Gilt Fund, managing an impressive AUM of ₹6,780.56 crore, offers a stable investment option with a focus on government securities. It delivers a 3-year CAGR of 7.57% and a 5-year CAGR of 7.86%, showcasing consistent performance.
The fund’s Sharpe ratio of 3.04 underscores excellent risk-adjusted returns, while an average maturity of 6.51 years reflects its balanced duration strategy. Backed by ICICI Prudential AMC, one of India’s leading fund houses, this fund is ideal for investors prioritising safety and moderate returns over a medium-term horizon.
Kotak Gilt Fund – PF & Trust
The Kotak Gilt Fund – PF & Trust, with an AUM of ₹4,441.90 crore, caters to investors seeking stability through government securities. It delivers a 3-year CAGR of 7.26% and a 5-year CAGR of 7.76%, ensuring steady growth.
With a Sharpe ratio of 1.98 and an average maturity of 26.86 years, the fund focuses on long-term securities, suitable for institutions like provident funds and trusts. Managed by Kotak AMC, this fund offers a low-risk investment avenue with consistent performance.
DSP Gilt Fund
The DSP Gilt Fund, with an AUM of ₹1,781.58 crore, focuses on generating stable returns by investing exclusively in government securities. It provides a 3-year CAGR of 7.33% and a 5-year CAGR of 7.76%, delivering steady growth for long-term investors.
The fund’s Sharpe ratio of 2.32 indicates good risk-adjusted performance, while its average maturity of 30.66 years highlights a focus on long-duration securities.
Kotak Gilt Fund (Q-IDCW)
The Kotak Gilt Fund (Q-IDCW), with an AUM of ₹4,441.90 crore, is designed for risk-averse investors seeking consistent returns through government securities. It offers a 3-year CAGR of 7.26% and a 5-year CAGR of 7.76%, demonstrating stable performance.
The fund’s Sharpe ratio of 1.97 reflects its ability to deliver risk-adjusted returns, while an average maturity of 26.86 years emphasises its focus on long-term securities. Managed by Kotak AMC, this fund can be an ideal choice for investors seeking safety and steady income with a quarterly dividend payout option.
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