In the last one year, the 10-year G-secs yields have risen from 6.20% to above 7%. Rising yields have driven bond prices lower, due to their inverse relationship. It has resulted in lower NAVs and lower returns for gilt fund investors. The 1-year returns for top gilt funds have ranged 0.50% to 3.25%.
If you have invested in a gilt fund, you must have noticed that the returns have been subdued in the last one year or so. It is happening because yields have been rising for the last one year or so. Rising yields lead to a fall in bond prices, thereby leading to a fall in the NAV of gilt funds and lower returns. In this article, we will understand how rising yields impact bond prices and gilt fund returns.
How have the yields on G-secs performed?
Last year, in May 2025, yields on the 10-year Government Securities (G-secs) bottomed out at levels of around 6.20%. Since then, the yields have been rising. On 6 June 2025, the RBI, in its MPC meeting, delivered a huge 50 basis points cut in the Repo Rate from 6.00% to 5.50%. The RBI changed the policy stance from accommodative to neutral.
The market took that as a signal: the scope for further interest rate cuts is limited and data-dependent. So, yields started rising inspite of the 50-basis points Repo Rate cut. Since then, yields have been rising, topping out at levels of around 7.10% in April 2026.
Source: https://tradingeconomics.com/india/government-bond-yield
The chart above shows that the 10-year G-sec yields have been climbing higher over the last one year. Some reasons why the G-sec yields have been rising include:
- Fears of a higher fiscal deficit for the Central Government and higher borrowings by the State Governments
- The US-Iran War, which has resulting in crude oil prices spiking, may result in higher inflation
- Delay in the inclusion of India’s G-secs in some global bond indices
- Selling of Indian G-secs by FPIs and pulling US Dollars out of India due to a depreciating Rupee, eating into their returns on the G-secs
Impact of rising yields on returns of gilt funds
In the earlier section, we understood why and how yields on the G-secs have risen in the last one year. Bond yields and bond prices have an inverse relationship. When G-sec yields move up, bond prices fall, and vice versa.
So, while the G-secs have been rising in the last one year, the bond prices have been falling. When the yields rise, the Government of India has to issue new G-secs at higher interest rates. These newly issued bonds, with higher interest rates, reduce the appeal of bonds issued earlier with lower interest rates.
As a result, investors sell bonds issued at lower interest rates to invest the sale proceeds in new bonds with higher interest rates. Selling puts pressure on bond prices, leading to a fall in bond prices.
The fall in the G-sec bond prices reduces the value of the assets held by a gilt mutual fund scheme. A decline in asset values reduces the net asset value (NAV) of the gilt fund. A lower NAV of the units results in lower returns for the investors holding these gilt fund units.
Performance of gilt funds
In the earlier section, we understood why the gilt funds have delivered lower returns in the last one year. Let us look at the returns of some gilt funds in the last one year.
Scheme name |
1-year returns |
6-month returns |
|
ICICI Pru Gilt Fund |
3.22% |
1.32% |
|
UTI Gilt Fund |
3.14% |
2.85% |
|
Franklin India Government Securities Fund |
2.91% |
2.18% |
|
Bandhan Gilt Fund |
2.64% |
2.87% |
|
Axis Gilt Fund |
1.75% |
1.30% |
|
Quant Gilt Fund |
1.57% |
1.00% |
|
SBI Gilt Fund |
1.25% |
1.08% |
|
HDFC Gilt Fund |
1.16% |
0.72% |
|
Baroda BNP Paribas Gilt Fund |
0.92% |
0.34% |
|
Tata GSF |
0.50% |
0.35% |
Source: Value Research Online
Note: The above returns are as of 08 May 2026. The schemes have been ranked as per 1-year returns. The returns are for direct schemes.
The table above shows that the best-performing scheme has delivered returns of only 3.22% in the last one year. Six of the top 10 performing schemes have delivered returns of less than 2% in the last one year.
What can investors expect?
Going forward, the outlook for gilt funds will depend on how G-sec yields behave, which, in the near term, will depend on how soon the US-Iran conflict ends. If the conflict ends soon and yields cool down, it will improve the outlook for gilt funds in the near term.
In the medium to long term, factors such as the impact of the US-Iran War on inflation, the monsoon (IMD has forecast a lower-than-normal monsoon), the fiscal deficits of the Central Government and State Governments, inclusion of Indian G-secs in more global bond indices, etc., will matter. If these factors turn favourable and the RBI cuts interest rates further, the outlook for gilt funds will improve further.
