Best Gilt Funds to Invest in 2021

The RBI announced a couple of months ago that retail investors will be allowed to invest directly in government bonds and treasury bills. With this investors will have access to both primary and secondary government bond market. At present investors can invest in government securities through broking firms or via the mutual fund route.

Notably, RBI is yet to provide clarification on procedural aspects for investment, redemption, and other details about investing directly in G-secs. Moreover, there can be a lot of price fluctuation on daily basis which can create difficulties if you want to sell your security in the secondary market before maturity.

Investing in G-secs through mutual fund schemes (such as Gilt funds) can be a more tax-friendly, liquid, and convenient way.

Image source: jcomp -

What are Gilt Funds?

Gilt funds are open-ended debt schemes that invest minimum 80% of its assets in government securities. These securities are issued by RBI on behalf of the government (central or state) and are used to fund various government projects. Backed by the government, these securities are highly liquid and carry very low credit risk.

Gilt mutual funds are of two types:

  • - Funds which invest in 10-year constant maturity instruments

  • - Funds that invest in instruments across varying maturities

In case of gilt funds with 10-year constant maturity, there is not much active management involved as the fund managers invest only in securities of the specified duration.

Graph: Placement of Gilt Funds on the Risk-Return spectrum

For illustration purpose only

While the credit risk associated with gilt funds is negligible, it is highly sensitive to interest rate movement. This is because gilt funds typically invest in medium to long duration government securities. As you may be aware higher the maturity profile the higher is the sensitivity to the interest rate movement.

Gilt funds can offer significant gains in a falling interest rate scenario but the returns may diminish in a stable or rising interest rate scenario. An upward rise in interest rate movement can negatively impact the NAV of the fund resulting in low returns or even short term loss in some cases.

Gilt funds are suitable for investors looking for preservation of capital and decent returns with an investment horizon of at least 5 years.

Table: Performance scorecard of Gilt Fund

Scheme Name Absolute (%) CAGR (%)
1 Year 2 Years 3 Years 5 Years
Gilt Fund with 10 year constant duration
IDFC G-Sec-Constant Maturity Plan 4.56 10.36 12.53 10.34
ICICI Pru Constant Maturity Gilt Fund 5.20 10.75 11.98 10.09
SBI Magnum Constant Maturity Fund 4.37 9.37 10.69 9.96
DSP 10Y G-Sec Fund 4.51 9.77 10.68 8.73
Short & Mid Term Gilt Fund
Nippon India Gilt Securities Fund 4.62 9.75 11.22 10.41
IDFC G-Sec-Invest 5.42 10.87 12.07 10.12
SBI Magnum Gilt Fund 4.96 10.43 10.86 9.88
DSP G-Sec Fund 5.21 10.66 11.60 9.88
Aditya Birla SL G-Sec Fund 5.09 9.93 10.93 9.83
ICICI Pru Gilt Fund 5.15 10.39 10.35 9.59
UTI Gilt Fund 3.34 8.86 9.51 9.45
Kotak Gilt Fund 5.05 10.04 10.84 9.35
Edelweiss Government Securities Fund 7.77 10.54 11.07 9.34
LIC MF G-Sec Fund 5.32 9.69 10.79 9.07
Crisil 10 Yr Gilt Index 3.95 8.15 9.65 7.40
Data as on June 03, 2021
(Source: ACE MF)
*Please note, this table only represents the best performing Gilt Fund based solely on past returns and is NOT a recommendation. Mutual Fund investments are subject to market risks. Read all scheme related documents carefully. Past performance is not an indicator for future returns. The percentage returns shown are only for an indicative purpose. Speak to your investment advisor for further assistance before investing

When the RBI started reducing policy rates from 2019 onwards gilt funds were among the top performers in the debt funds category and offered returns at around 12% on an average which is nearly as good as the returns offered by diversified equity funds. But now that the interest rates have stabilised gilt funds have been generating significantly lower returns. However, over the longer time frames the category still carries an encouraging record.

The returns from gilt funds can vary remarkably over a period, and therefore it is important to avoid investing in Gilt funds based on recent returns.

Best Gilt Funds to invest in 2021:

Some of the best performing Gilt fund based on our analysis and research at PersonalFN that fare well on both quantitative and qualitative parameters are as follows:

These funds have shown superior performance and consistency in terms of returns and have done well to ride the interest rate cycles thus generating better risk-adjusted returns.

Here are the parameters to look into while selecting the best Gilt Fund

Quantitative parameters

The fund should have a decent track record of delivering adequate and stable returns across time horizons when compared to the category average and the benchmark index. Moreover, it should be able to take active and timely duration calls to reduce interest rate risk and reward investors across interest rate cycles.

Furthermore, the fund should be able to justify the returns by generating competitive risk-adjusted returns for its investors. To determine whether the fund has rewarded its investors well for the risk they have taken, assess risk-reward ratios like Sharpe Ratio, Sortino Ratio, and Standard Deviation over a 3-year period.

So when you are shortlisting funds for your portfolio, give preference to those funds that stand strong on risk-reward parameters.

Qualitative parameters

Gilt funds that invest in securities of varying maturities have the ability to adapt to the changing interest rate scenario and can determine the general maturity range for the portfolio after considering the outlook based on the economic environment (inflation, government's borrowing plan, fiscal deficit, etc.), the performance of the corporate sector, general liquidity situation, and so on.

Whereas constant maturity gilt funds do not have much flexibility in managing the average maturity and the portfolio is usually concentrated in a security of specified duration. However, that should not be a cause of concern because government securities are highly liquid and can be redeemed whenever a need arises.

When selecting between gilt funds with similar track record, choose the one with lower expense ratio. Most importantly, always give higher importance to fund houses that follow robust investment processes and systems along with sound risk management techniques in place.

Remember debt funds are not risk free. Choose a debt fund which is in line with your investment objective, horizon and risk appetite.

Watch this short video to know about the types and basics of debt mutual funds:


At PersonalFN, we select and recommend mutual funds based on quantitative and qualitative parameters using our S.M.A.R.T Score Matrix:

S - Systems and Processes

M - Market Cycle Performance

A - Asset Management Style

R - Risk-Reward Ratios

T - Performance Track Record

The outlook for Gilt Funds in 2021:

The present interest rate cycle is likely to have bottomed out. Most of the rally at the longer end of the yield curve has already come about since the time RBI started reducing policy rates. Therefore, debt securities with longer maturity papers (such as Gilt funds) may not be able to generate returns as seen in the last couple of years.

In the current uncertain times, the longer end of the yield curve could be more sensitive than the shorter end. The returns may moderate on the longer end of the yield curve and could turn riskier (may encounter high volatility) in the foreseeable future.

Given the current interest rate scenario, invest in gilt funds only if you have an investment horizon of 5 years or more to ride the interest rate cycles. Ensure that you have the ability to handle the market volatility and periods of low/negative returns to earn better returns over the long term. Avoid investing in gilt funds if you have short to medium term investment horizon.

PS:   If you are looking for quality mutual fund schemes to add to your investment portfolio, I suggest you subscribe to PersonalFN's premium research service, FundSelect. Currently, with the subscription to FundSelect, you could also get Free Bonus access to PersonalFN's Debt Fund recommendation service DebtSelect.

Under DebtSelect, we give high weightage to schemes displaying worthy portfolio characteristics. We avoid debt mutual fund schemes that aim for higher yields by taking undue higher credit risk with substantial exposure in instruments issued by private issuers.

If you are serious about investing in a rewarding mutual fund scheme, Subscribe now!


Warm Regards,
Divya Grover
Research Analyst


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