If your gilt fund returns have been lackluster recently, you’re not alone. Over the past year, returns for top gilt funds have hovered between 0.50% and 3.25%. This subdued performance is directly tied to a rise in Government Security (G-sec) yields, which have climbed from roughly 6.20% to over 7.10% between May 2025 and April 2026.
The Inverse Relationship: Yields vs. Prices
To understand why gilt funds are struggling, it is essential to recognize the fundamental rule of bond investing: Bond prices and yields move in opposite directions.
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When Yields Rise: New bonds are issued with higher interest rates. Existing bonds (with lower rates) become less attractive, and their market price falls.
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Impact on NAV: Since gilt funds hold these existing government bonds, a drop in bond prices reduces the fund’s Net Asset Value (NAV), leading to lower returns for investors.
Why Are G-Sec Yields Rising?
Several macroeconomic factors have contributed to the upward pressure on Indian bond yields in 2026:
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Geopolitical Tension: The US-Iran conflict has caused a spike in crude oil prices, raising fears of higher inflation.
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Fiscal Concerns: Concerns over higher fiscal deficits for the Central Government and increased borrowing by State Governments.
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Foreign Outflows: Foreign Portfolio Investors (FPIs) have been selling Indian G-secs, partly due to a depreciating Rupee.
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Policy Stance: While the RBI cut the Repo Rate by 50 basis points (to 5.50%) in June 2025, it shifted its stance to “neutral,” signaling limited room for further cuts.
1-Year Performance of Top Gilt Funds (as of May 8, 2026)
| Scheme Name | 1-Year Return | 6-Month Return |
| ICICI Pru Gilt Fund | 3.22% | 1.32% |
| UTI Gilt Fund | 3.14% | 2.85% |
| Franklin India Govt Securities | 2.91% | 2.18% |
| Bandhan Gilt Fund | 2.64% | 2.87% |
| Axis Gilt Fund | 1.75% | 1.30% |
| SBI Gilt Fund | 1.25% | 1.08% |
| Tata GSF | 0.50% | 0.35% |
What Should Investors Expect?
The future of gilt fund returns depends heavily on whether yields cool down.
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Short-Term: Recovery will likely depend on the resolution of the US-Iran conflict and its impact on global oil prices.
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Medium-to-Long Term: Returns will be influenced by the monsoon performance (currently forecast to be lower than normal), progress on India’s inclusion in global bond indices, and whether the RBI sees enough stability to resume interest rate cuts.
For now, gilt funds remain sensitive to interest rate volatility. They are generally best suited for investors who can navigate market cycles or those expecting interest rates to fall in the future.
