Gilt Funds Struggling: What Investors Should Know

In recent times, gilt funds in India have been facing significant challenges with their returns. As of May 2026, the best-performing gilt fund managed to deliver only 3.22% returns over the past year. This is a worrying trend for investors who expect better performance from their investments. The major reason behind these low returns is the rising yields on government securities (G-secs).

Last year, in May 2025, the yields on 10-year G-secs hit a low of around 6.20%. Since then, yields have been steadily increasing. On June 6, 2025, the Reserve Bank of India (RBI) made a notable move by cutting the repo rate by 50 basis points, from 6.00% to 5.50%. This change shifted the RBI’s policy stance from accommodative to neutral, indicating a more cautious approach toward monetary policy.

The performance of various gilt funds reflects this trend. For instance, some of the top-performing gilt funds, like the ICICI Pru Gilt Fund and UTI Gilt Fund, have shown disappointing returns of just over 3%. Many other funds have delivered less than 2% returns, which is concerning for investors seeking safe yet profitable avenues for their money.

The outlook for gilt funds in the coming months will largely depend on external factors, especially the resolution of the US-Iran conflict. If the conflict resolves quickly and yields stabilize, it could provide a much-needed boost to the gilt fund market. However, investors should be aware that this is just one aspect of a larger picture.

In the medium to long term, several other factors will also play a crucial role in determining the performance of gilt funds. These include the impact of the ongoing US-Iran War on global inflation rates, the monsoon forecasts (with the India Meteorological Department predicting a below-normal monsoon), and the fiscal deficits faced by both the Central and State Governments.

Furthermore, the potential inclusion of Indian G-secs in more global bond indices could also improve the attractiveness of these funds. If these factors align positively and the RBI implements further interest rate cuts, the outlook for gilt funds could improve significantly, offering better opportunities for investors.