A Gilt Fund invests only in central and state government bonds — zero credit risk but high interest rate risk, making it volatile in rate-change environments.
Gilt funds invest exclusively in government securities (G-secs, SDL — State Development Loans, Treasury Bills) issued by central or state governments. Since these are sovereign obligations, there is zero credit risk. However, gilt funds have high duration — sometimes 7–15 years — making them extremely sensitive to interest rate changes. When rates fall, gilt fund NAVs rise sharply (capital appreciation). When rates rise, NAVs fall hard.
Gilt funds lend your money to the Government of India — which has zero chance of defaulting. So there's no credit risk. The catch: government bonds have long maturities (10–30 years). If interest rates rise after you invest, the value of existing bonds falls — and your NAV falls with it. If rates fall, your NAV rises (possibly significantly). Gilt funds are for investors who believe interest rates will fall and want to profit from it — not for capital preservation.
100% in government securities — central government bonds, state government bonds, T-bills.
High duration (often 8–12 years) means high interest rate sensitivity.
Rate cut cycle: gilt funds can deliver 12–18% returns in one year.
Rate hike cycle: gilt funds can deliver -5% to -10% in one year.
SEBI has a 'Gilt Fund with 10-year constant duration' sub-category for even more targeted rate plays.