Gilt Fund

A gilt fund lends almost entirely to the government. Under SEBI rules it must hold at least 80% of its portfolio in government securities (G-Secs) — bonds issued by the Centre and states through the RBI. Because the sovereign is the borrower, these funds carry virtually no default (credit) risk: you will get your money back. The catch lies elsewhere.

The Trade-Off: No Credit Risk, High Rate Risk

What gilt funds give up in credit safety they take on in interest-rate risk. Bond prices move opposite to interest rates, and many gilt funds hold long-dated bonds, which are the most sensitive of all. When rates fall, the older, higher-paying G-Secs in the portfolio become more valuable, prices rise, and the fund's NAV climbs. When rates rise, the reverse happens and NAVs can drop sharply. So while you won't lose money to a default, you can absolutely see losses from a poorly timed rate cycle.

Why They're in Focus Now

This is precisely why gilt funds have been drawing attention. With the RBI delivering substantial rate cuts through 2025 — around 125 basis points — and the 10-year G-Sec yield drifting lower, long-duration gilt funds have been well placed to benefit. Investors anticipating further easing have piled in: the category added thousands of new folios over the past year, a sharp jump, as well-heeled investors bet on a bond rally. Long-duration gilt funds posted attractive returns when rate-cut expectations ran high.

Who Should Consider Them

Gilt funds suit investors who want zero credit risk and are willing to take a view on interest rates, ideally with a longer holding period to ride out volatility. They are best entered when rates look poised to fall and held — or trimmed — as the cycle matures. They are *not* a parking spot for money you might need at short notice, because NAVs swing.

Two final cautions. First, timing matters more here than in most debt funds; getting the rate cycle wrong hurts. Second, taxation now treats gains at your slab rate regardless of holding period, like other debt funds — so factor that in. Used thoughtfully, a gilt fund is among the cleanest ways to express a bullish view on falling Indian rates.