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Should I Invest In Gilt Funds? Everything You Need To Know Before Investing In Gilt Funds



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World’s economy is going through very rough times. Forget aggressive investors, portfolio of conservative investors are highly volatile. People who saw ads on tv quoting “Mutual Funds Sahi hai” (Mutual Fund is great) are sitting on losses even after doing systematic investment for over 3 years! There have been multiple incidents in recent times which dusted thousands of crores from our pockets. Recently people have seen bond defaults, Franklin Fiasco, write-offs, lower circuits on Indices.

In this period when 90% of Equity Mutual Funds have generated negative returns over the past 1 year, we have a specific type of Funds which have generated over 15% returns. Yes, we are talking about Gilt Funds. As far as I remember, these funds were not popular a few years back as everyone was busy in minting double-digit returns in equities. Now, as equities are not performing very well, people/retail investors are getting lured into Gilts (just out of greed OR for the sake of diversification). In this article, we are going to find out more about these funds, why has it performed better and should you invest in it.

What are Gilt Funds?

These funds are a specific category of debt funds which invest in Government Securities often termed as G-Secs. The maturity of these securities varies from 5 years to 25 years!


Any debt instrument has 2 types of risks associated with it, namely “Credit Risk” and “Interest Rate Risk”. As these are government bonds, they have a sovereign guarantee and there is no risk of defaults and hence, they carry 0 credit risk. However, as the maturity period is long, they have very high-interest rate risks! The prices of these bonds fluctuate wildly whenever there is a speculation in a change in repo rates. Due to the high-interest rate risk, these funds are very volatile in nature. Bond prices tend to move upwards whenever the market expects a reduction in repo rates and vice-versa.

Why does the Repo rate affect bonds?

Let’s explain this by using a real example. Current repo rate stands at 4% and currently, a 20-year government bond gives 7% per annum. Suppose you buy a 20-year government bond, it will give you 7% per annum for 20 years. Now, let’s say repo rate goes down by 0.5% in the near future, then newly issued government bonds will give 6.5% per annum. Hence, the demand for old bonds which are giving 7% per annum will go up and its price will eventually go up due to higher demand. On the contrary, let’s say repo rate goes up by 0.5% in the near future, then newly issued government bonds will give 7.5% per annum. Hence, the demand for old bonds which are giving 7% per annum will go down and its price will eventually go down due to lower demand.

This is the reason why bonds fluctuate wildly with any changes in repo rates.

Repo Rates and Bond Value Cycle :

Repo rates tend to go down when the economy slows down, this is done to inject more liquidity in the economy by increasing the loan/borrowing demands. In contrary, repo rates go up when the economy performs well. Kindly go through the chart showing repo rates in the last 10 years.

Repo_RatesOne can see that when our economy was performing well in 2010-2012, rates went up and after 2016, we had slowdowns in the economy which allowed rate cuts. The rate cuts were more aggressive after 2018 especially during COVID pandemics which increased bond demands which allowed gilt funds to give double-digit returns.

However, as we speak, repo rates are at a historically low level. Rate cuts will be limited in the near future and when the economy recovers, we might see an increase in rates which will damage the returns. The same thing happened back in 2009-2010, gilt funds gave -10% returns in a week back in 2009. The yearly returns were also negative. Let’s look at the chart for better clarity.

Gilt_FundYou can see that in the 2008 recession, gilt funds gave good returns but then it gave -12% returns in the next 2 years! And it took around 4 years to reach 2008 highs.

Historical Returns :

Let’s look at the annual returns in the last 10 years.

Gilt_FundOne can see that out of 10 years, gilt funds have delivered 5-6% annual returns for 5 years. Average returns of the last 10 year stand at 8.9%.

                                 Attaching the chart of inflows in gilt funds.

Gilt Fund ChartGilt Fund Chart

Retail investors are pumping their money as gilt funds are giving better returns. This could be very very risky. They are expecting to get 15% returns in 1 year and can end up with -10% returns.


  1. Avoid gilts for short term goals/investments.
  2. Expect a realistic return: Gilt is not gonna get you 15% returns every year. You will get 10% annualized returns over a longer period.
  3. Returns can be negative for 2-3 years.
  4. Use gilts to diversify your long term investments.
  5. Gilts are used to hedge against the economy. One can do lumpsum in gilts when repo rates are high. Lumpsum in gilts at historically low repo rates makes no sense.
  6. Annualized returns were 2.2% for period 2008-2013. Be prepared for it.