The RBI’s repo charge reduce has made gilt mutual funds look enticing, however blindly investing now can expose you to volatility and surprising losses.
The RBI’s current repo charge reduce has made headlines — and so have gilt mutual funds, which make investments solely in authorities securities (80%). With long-term gilt funds exhibiting sharp upward actions, many buyers at the moment are tempted to experience the wave. In any case, gilt funds are thought of secure when it comes to credit score danger, and with rates of interest falling, they appear like a no brainer.
However wait — there’s much more beneath the floor. Whereas gilt funds provide excessive potential throughout falling rate of interest cycles, blindly investing in them with out understanding the dangers can result in remorse.
Discuss with the historic repo charge of RBI – RBI Repo Charge Historical past from 2000 to 2025
RBI Charge Lower: Don’t Make investments Blindly Into Gilt Mutual Funds!
Why Gilt Funds Are within the Highlight
Gilt funds put money into central authorities securities, that are thought of free from default danger. As per the definition of Gilt Funds, they’ve to take a position round 80% of the portfolio in central authorities bonds. When the RBI cuts charges, the yield on these bonds falls, and their costs rise (worth Vs bond yield is at all times inverse in relation) — particularly those with lengthy maturities. Gilt funds profit from this rise, which is why their current returns look enticing.
However excessive returns prior to now don’t assure future efficiency — and that’s precisely the place the danger lies.
1. Curiosity Charges Received’t Preserve Falling Perpetually
Gilt funds are extremely delicate to rate of interest actions. Sure, the RBI has reduce the repo charge now — however future strikes rely on inflation, fiscal deficit, international crude costs, and different macro elements. If inflation rises once more, or if international situations tighten, charge cuts could pause — and even reverse.
In that case, long-duration gilts (and funds that maintain them) can face sharp capital erosion.
2. Gilt Funds Have Excessive Length Danger
Gilt mutual funds, particularly long-duration and 10-year fixed maturity funds, carry very excessive period. Which means a small upward transfer in rates of interest may cause vital detrimental returns. Overlook concerning the 10 12 months fixed maturity funds, when you verify the portfolio of lots of the out there gilt funds, you seen that the typical maturity of those bonds is greater than 10 years.
For instance:
- A fund with a modified period of seven may lose round 7% in worth if yields rise or fall of rate of interest by 1%.
- Macaulay period is one other approach of understanding volatility. Macaulay Length is a measure of how delicate a bond (or gilt fund) is to rate of interest modifications. Consider it like this: If you happen to put money into a gilt mutual fund, Macaulay Length tells you the way lengthy (in years) it would take, on common, to get your a reimbursement from all of the curiosity funds and the principal. However extra importantly for buyers, the upper the period, the extra the fund’s worth will swing when rates of interest change. So, when RBI cuts the repo charge, long-duration gilt funds achieve extra — their costs shoot up. But when charges go up, these similar funds fall extra sharply than short-duration ones. That’s why blindly leaping into high-duration gilt funds after a charge reduce might be dangerous — if charges rise once more, you can face losses.
This type of volatility might be stunning for conservative buyers who anticipated “secure returns from authorities bonds.”
3. Previous Efficiency Is Not a Dependable Indicator
A typical entice: Seeing current 1-year returns of 10% or extra in gilt funds and assuming the development will proceed. However usually, by the point retail buyers enter, the majority of good points are already priced in. Bonds transfer in anticipation of charge cuts — not simply after the very fact.
Getting into gilt funds after a charge reduce can typically imply shopping for excessive, which leaves little room for additional upside.
4. You Nonetheless Want a Lengthy Funding Horizon
Regardless that gilt funds carry no credit score danger, they don’t seem to be meant for short-term buyers. Their volatility makes them appropriate just for these with a minimum of a ten+ years horizon.
Therefore, exploring gilt funds to your short-term targets is very dangerous.
5. Taxation Has Modified, Returns Aren’t as Engaging as Earlier than
With the 2023 change in debt fund taxation, gilt funds not get pleasure from indexation advantages. They’re now taxed at your revenue slab charge, similar to fastened deposits. For these within the 30% tax bracket, this considerably reduces post-tax returns.
So whereas returns could look enticing earlier than tax, the web profit won’t be a lot better than safer, extra predictable alternate options.
So, Ought to You Keep away from Gilt Funds?
Not essentially. Gilt funds can play an necessary function in a debt portfolio, particularly when charge cuts are anticipated. However the hot button is:
- Don’t make investments blindly based mostly on previous returns
- Perceive your danger tolerance and time horizon
- Know that volatility is a part of the deal, even with “secure” authorities bonds
- Favor goal maturity gilt funds if you need extra predictability
- By investing in Gilt Funds you’re simply avoiding the credit score danger. Rate of interest danger is at all times there.
Conclusion –
Gilt funds are sometimes misunderstood. They’re low on credit score danger, however excessive on rate of interest danger. A falling charge atmosphere does create alternatives — however solely for individuals who know what they’re entering into. If you happen to’re investing simply because everybody else is, or as a result of a fund delivered 10% final 12 months, hit pause. Perceive the product. In case your purpose is 10+ years, then solely discover.
