Gilt funds, which are mutual funds investing in fixed-interest generating securities issued by the central and state governments, have garnered attention among aggressive debt investors. These funds direct investments towards government-funded infrastructure projects and other safe expenditures. Notably, Groww Mutual Fund has recently launched the Groww Gilt Fund, aiming to provide investors with a government-backed investment option that is particularly suitable for portfolio diversification.
Mutual fund advisors advocate gilt funds for ‘aggressive’ or ‘sophisticated’ debt investors, anticipating superior returns if the Reserve Bank of India (RBI) starts cutting interest rates. This recommendation is driven by the potential benefits gilt funds offer during a likely fall in interest rates. However, these funds are inherently risky, as they are sensitive to changes in interest rate scenarios. Consequently, such schemes are suggested only to informed investors who are prepared to take risks and have a long investment horizon.
What are Gilt funds?
Under SEBI norms, gilt funds must invest at least 80% of their corpus in government securities. These funds essentially invest in government papers or lend to the government, resulting in zero credit risk and no defaults. Nonetheless, they remain extremely susceptible to interest rate changes. When the Government of India requires funds, it approaches the RBI, which acts as a banker by lending money borrowed from entities like insurance companies and banks. In exchange, the RBI issues fixed-tenure government securities subscribed by the fund managers of gilt funds. Upon maturity, these funds return the securities and receive the principal amount.
Groww Gilt Fund
The recent entrant, Groww Gilt Fund, opened its New Fund Offer (NFO) on 23 April 2025, closing on 7 May 2025. It plans to allocate a minimum of 80% of its assets to government securities across various maturities. This initiative underscores a low-risk investment strategy, appealing to those seeking a government-backed, low-risk option. The fund aims to diversify portfolios by reducing risk during market uncertainty and offering liquidity through the flexibility to enter or exit due to the liquid nature of government securities.
For investors, gilt funds present an ideal blend of low risk and potentially reasonable returns, though their performance is highly dependent on the movement of interest rates. A falling interest rate regime is considered an optimal period for investing in gilt funds. As Groww Mutual Fund introduces its new scheme, investors are encouraged to consider the benefits of this strategic investment, especially amidst expected economic adjustments and improving fiscal conditions.
Gilt Funds in 2025
In 2025, gilt funds are witnessing strong investor interest as market volatility and rate cycle uncertainties push investors toward low-risk, sovereign-backed assets. A closer analysis of the latest data reveals distinct leaders across short-, medium-, and long-term return periods.
The DSP Gilt Fund – Direct Plan emerges as a standout performer, topping the charts for both three-month (4.66%) and one-year returns (13.39%). Its consistent performance across periods highlights strong portfolio management and timely duration calls, making it a compelling choice for investors seeking both stability and growth.
The Axis Gilt Fund – Direct Plan also maintains a strong presence across timeframes, with a 13.21% one-year return and 4.49% over three months. Similarly, the Invesco India Gilt Fund – Direct Plan and Aditya Birla Sun Life Government Securities Fund have shown resilience and steady gains, positioning themselves among the top five funds across short- and long-term returns.
On the six-month horizon, ETF options like Nippon India ETF Nifty 8-13 Yr G-Sec Long Term Gilt, Mirae Asset Nifty 8-13 Yr G-Sec ETF, and LIC MF Nifty 8-13 Yr G-Sec ETF have performed strongly, delivering returns above 6.45%. Their success reflects growing investor appetite for passive, low-cost exposure to government securities.
Source: Value Research