Rising yields put pressure on gilt funds, experts recommend tactical approach

Rising bond yields over the last year have led to weak returns in gilt funds. Wealth managers say gilt funds are highly sensitive to interestrate movements and are best suited for investors who can make tactical calls at the right stage of the interest-rate cycle.

WHAT ARE GILT FUNDS?

Gilt funds are a category of debt mutual funds that invest in Government Securities (G-Secs). These schemes hold a mix of government bonds with varying maturities. Since the securities are backed by the sovereign, these funds do not carry corporate credit risk, making the probability of default extremely low. As per AMFI data, there are 23 gilt funds managing around Rs 33,000 crore of investor money. The mutual fund industry’s debt asset under management was at Rs 19.14 lakh crore as on April 30, 2026.
IF DEBT MUTUAL FUNDS HAVE ZERO CREDIT RISK, WHY IS THIS CATEGORY NOT AS POPULAR AS OTHER DEBT FUND CATEGORIES LIKE LIQUID, SHORT-DURATION AND CORPORATE BOND FUNDS?
While gilt funds carry negligible credit risk because they invest only in sovereign-backed securities, they remain highly sensitive to interestrate movements. Most gilt funds hold medium- to long-duration government bonds, whose prices can fluctuate sharply when bond yields move. As a result, returns could be uncertain, unlike fixed deposits or short-duration debt funds that offer relatively stable returns. Since many retail investors in debt products prioritise stability and liquidity over interest rate directional bets, categories such as liquid, shortduration and corporate bond funds tend to be more popular.

SO, HOW DO GILT FUNDS MAKE MONEY?

Gilt funds make money in two ways. One is through the interest earned on government bonds and through gains when bond prices rise. Bond prices usually rise when interest rates and bond yields fall. Since gilt funds often hold long-term bonds, they can deliver strong returns during falling interest-rate cycles and performs better than other debt fund categories in such periods. But when yields rise, their returns can turn weak or even negative.
HOW HAVE GILT FUNDS PERFORMED IN THE PAST YEAR?
Over the last one year, the benchmark 10-year government bond yield rose from 6.2% to 7.03%. When bond yields rise, prices of bonds fall, which hurts the Net Asset Values (NAVs) of gilt funds. As per Value Research data, gilt funds on average lost 0.68% over the last one year.WHO SHOULD INVEST IN GILT FUNDS AND WHAT’S THE BEST TIME TO INVEST?
Gilt funds are best suited for investors who understand interest rate cycles. Since these tend to perform well when interest rates and bond yields fall, investors must aim to buy when bond yields are elevated. Wealth advisors usually advise investors to accumulate when the 10-year benchmark is at 7.2%-7.3% levels. This product may not be suitable for investors seeking stability in returns or high liquidity.