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A gilt fund is a SEBI-categorised open-ended debt scheme that invests a minimum of 80% of its net assets in government securities (G-Secs) issued by the Central Government or State Governments. The 80% floor is mandated by SEBI Circular SEBI/HO/IMD/DF3/CIR/P/2017/114 (6 October 2017). The term "gilt" derives from UK gilt-edged securities, historically referring to British Treasury bonds; in the Indian context, it refers to G-Secs and SDLs (State Development Loans), which carry the sovereign credit of the Central or State Government.
SEBI permits two variants under this sub-category: a standard gilt fund with no specific duration mandate, and a gilt fund with 10-year constant duration, which maintains a Macaulay duration close to 10 years at all times — providing a pure expression of long-end rate sensitivity.
What sits in the portfolio
The 80%+ G-Sec floor means the portfolio is predominantly:
- Central Government dated securities: Medium to long-dated bonds (5–40 years) auctioned by RBI. The 10-year benchmark G-Sec is the most liquid; 40-year bonds (introduced in recent years) are held in some gilt funds for maximum duration.
- State Development Loans (SDLs): Bonds issued by state governments through RBI auctions; slightly higher yield than central G-Secs of comparable maturity due to lower liquidity.
- Treasury bills (T-bills): 91-day, 182-day, or 364-day central government discount instruments; counted within the 80% government securities allocation.
- Remaining ≤20%: Corporate bonds (typically AAA-rated PSU bonds), cash, or repo positions for liquidity management.
Fund managers actively manage duration within the permitted range by rotating between short-dated and long-dated G-Secs, positioning for RBI rate cuts (which lift long-bond prices) or hiking cycles (which depress them). The 10-year constant-duration variant eliminates this active positioning, locking exposure to the long-end rate.
Risk profile
Gilt funds carry zero credit risk within the government securities portion — G-Secs are backed by the sovereign borrowing authority of the Government of India, and historically no Indian sovereign security has defaulted. However, gilt funds carry very high duration (interest rate) risk:
- A 10-year gilt fund with a Macaulay duration of 7–8 years will lose approximately 7–8% in NAV for each 100 bps upward movement in benchmark yields.
- Rate volatility in Indian G-Sec markets is driven by RBI Monetary Policy Committee (MPC) decisions, fiscal deficit trajectory, global crude oil prices, FPI inflows/outflows into the debt market, and global central bank actions.
- Gilt funds have historically exhibited equity-like short-term NAV volatility during rate hiking episodes while providing significant returns during rate-cutting cycles.
The RBI 10-year benchmark G-Sec yield series (published at rbi.org.in) is the primary reference for tracking gilt fund performance benchmarks.
Taxation (post-Finance Act 2023)
Gilt funds were among the debt fund categories most affected by Finance Act 2023 Section 50AA. Previously, long-term investors holding gilt funds for more than 3 years could benefit from 20% LTCG with indexation — particularly attractive during low-inflation environments. Post-April 2023, all gains from gilt fund units purchased on or after 1 April 2023 are treated as STCG and taxed at the applicable income slab rate, irrespective of holding period. Units held before 1 April 2023 may retain grandfathered treatment; verify with a qualified tax professional for transition-year specifics.
Worked example
SBI Magnum Gilt Fund (AMFI scheme code: 101406 — illustrative; verify from amfiindia.com) is a long-standing standard gilt fund. As at 31 March 2025, its reported portfolio had approximately 85% in central G-Secs and SDLs, average maturity of approximately 10.5 years, and a modified duration of approximately 7.2 years. During the RBI rate-cutting cycle of June–December 2024, a 50 bps cumulative cut in the repo rate resulted in approximately 3–4% NAV appreciation in the fund — consistent with the modified duration effect. Conversely, in the rate-hiking cycle of May–December 2022, the fund's NAV declined approximately 4–5% as the 10-year G-Sec yield rose from 6.8% to 7.4%.
See also
Primary source
SEBI Circular SEBI/HO/IMD/DF3/CIR/P/2017/114 (6 October 2017): sebi.gov.in. RBI Government Securities market overview and G-Sec yield series: rbi.org.in. Finance Act 2023, Section 50AA. AMFI scheme data: amfiindia.com.
Past performance is not indicative of future returns. Mutual fund investments are subject to market risks. Read all scheme-related documents carefully. ARN-314872. APMI APRN-01658. Content is informational and not investment advice.