Gilt Mutual Funds in India Rise as RBI Cuts Rates and Adds Liquidity

Recent policy moves by the Reserve Bank of India are drawing investor attention to gilt mutual funds. Softer 10-year government bond yields, gains in financial stocks and a supportive liquidity backdrop are prompting some market participants to reassess debt allocation. For investors focused on government securities, gilt mutual funds are emerging as one of the key vehicles to access this segment efficiently.

The RBI, led by Governor Sanjay Malhotra, announced a 25 basis points policy rate cut. Alongside this, the central bank also confirmed open market operation purchases of government securities worth Rs 1 trillion. A three-year dollar-rupee buy/sell swap facility has been introduced as well, which is expected to add further rupee liquidity into the banking system.

Commenting on the policy stance, N. ArunaGiri, CEO, TrustLine Holdings, said, "This is an unequivocally growth-supportive policy - anchored not only by rate cuts but also by liquidity infusion through OMOs and rupee-dollar swaps. However, despite the continued accommodative stance, one is not sure about further rate cuts. While the central bank has projected a benign inflation outlook for the first half of FY27, it has refrained from providing guidance for the second half, where the real risks could potentially re-emerge," stated N. ArunaGiri, CEO, TrustLine Holdings.

The open market purchases and the dollar-rupee swap are expected to ease financial conditions. Experts note that the recent Monetary Policy Committee decision supports both macroeconomic stability and growth. They add that this environment can improve opportunities for investors across debt and equity, while potentially keeping inflation expectations anchored under the RBI’s stated framework.

Market reaction after the announcement has been watched closely by domestic investors. "For Indian investors, today's reaction, softer 10-year yields, Nifty above 26,000, and broad gains in financials, autos, NBFCs and realty - confirms this as a "Goldilocks" cut: supportive for growth without threatening macro stability. For portfolios, our bias from here: accumulate 5-7 year G-secs and maintain an overweight in well-capitalised PSU banks and quality retail-credit franchises as the core expression of this easing cycle," stated Karthick Jonagadla, Investment manager on smallcase and Founder of Quantace Research.

Against this backdrop, investors who prefer exposure to sovereign debt are looking at gilt mutual funds. These schemes invest only in government securities, which carry sovereign backing. Hence, they are free from credit risk linked to private issuers, although they remain sensitive to interest rate changes. This sensitivity can benefit investors when yields decline and bond prices rise.

According to the Association of Mutual Funds in India (AMFI), gilt refers specifically to government securities. Gilt mutual funds primarily buy such instruments with medium to long maturities, generally between three years and twenty years. A lock-in of 10 years applies only to gilt funds that are managed with a constant 10-year duration mandate, rather than to the entire gilt category.

For investors comparing performance within the category, recent three-year returns show moderate variation across schemes. The table below lists five gilt mutual funds with relatively higher three-year returns, across both regular and direct plans, along with their respective benchmarks. These figures help investors see how each scheme has done versus its chosen gilt index over the same period.

Scheme Name	Benchmark	3-Year Return (%) – Regular	3-Year Return (%) – Direct	Benchmark Return (%)
UTI Gilt Fund with 10-Year Constant Duration	CRISIL 10 Year Gilt Index	7.55	8.07	7.89
ICICI Prudential Gilt Fund	Nifty All Duration G-Sec Index	7.53	8.09	7.78
Baroda BNP Paribas Gilt Fund	CRISIL Dynamic Gilt Index	7.35	7.71	7.85
Axis Gilt Fund	CRISIL Dynamic Gilt Index	7.16	7.62	7.85
Bandhan Gilt Fund	CRISIL Dynamic Gilt Index	7.02	7.68	7.85

These performance numbers highlight how different strategies within the same category can deliver varied outcomes. Investors should compare expense ratios, duration profiles and risk tolerance along with past returns. Gilt mutual funds may suit investors who accept interest rate volatility, seek sovereign credit quality and prefer transparent exposure to the government securities yield curve.

Readers should also note the broader risk disclosures around such products. Return figures are based on past data and do not assure future performance. The views and recommendations expressed are solely those of the individual analysts or entities and do not reflect the views of Goodreturns.in or Greynium Information Technologies Private Limited (together referred as "we"). We do not guarantee, endorse or take responsibility for the accuracy, completeness or reliability of any content, nor do we provide any investment advice or solicit the purchase or sale of securities. All information is provided for informational and educational purposes only and should be independently verified from licensed financial advisors before making any investment decisions.