The RBI’s repo price minimize has made gilt mutual funds look engaging, however blindly investing now can expose you to volatility and surprising losses.
The RBI’s current repo price minimize has made headlines — and so have gilt mutual funds, which make investments completely in authorities securities (80%). With long-term gilt funds exhibiting sharp upward actions, many buyers at the moment are tempted to journey the wave. In spite of everything, gilt funds are thought of protected by way of 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 supply 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 price 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 speculate 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 all the time inverse in relation) — particularly those with lengthy maturities. Gilt funds profit from this rise, which is why their current returns look engaging.
However excessive returns previously don’t assure future efficiency — and that’s precisely the place the chance lies.
1. Curiosity Charges Gained’t Maintain Falling Eternally
Gilt funds are extremely delicate to rate of interest actions. Sure, the RBI has minimize the repo price now — however future strikes depend upon inflation, fiscal deficit, international crude costs, and different macro components. If inflation rises once more, or if international circumstances tighten, price 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 length. Which means a small upward transfer in rates of interest may cause important detrimental returns. Overlook concerning the 10 yr fixed maturity funds, in case you examine the portfolio of most 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 length of seven may lose round 7% in worth if yields rise or fall of rate of interest by 1%.
- Macaulay length is one other manner of understanding volatility. Macaulay Length is a measure of how delicate a bond (or gilt fund) is to rate of interest adjustments. Consider it like this: In case you 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 length, the extra the fund’s worth will swing when rates of interest change. So, when RBI cuts the repo price, long-duration gilt funds achieve extra — their costs shoot up. But when charges go up, these identical funds fall extra sharply than short-duration ones. That’s why blindly leaping into high-duration gilt funds after a price minimize may be dangerous — if charges rise once more, you could possibly face losses.
This sort of volatility may be surprising for conservative buyers who anticipated “protected returns from authorities bonds.”
3. Previous Efficiency Is Not a Dependable Indicator
A standard entice: Seeing current 1-year returns of 10% or extra in gilt funds and assuming the development will proceed. However typically, by the point retail buyers enter, the majority of features are already priced in. Bonds transfer in anticipation of price cuts — not simply after the very fact.
Coming into gilt funds after a price minimize 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 aren’t meant for short-term buyers. Their volatility makes them appropriate just for these with not less than a ten+ years horizon.
Therefore, exploring gilt funds to your short-term objectives is very dangerous.
5. Taxation Has Modified, Returns Aren’t as Enticing as Earlier than
With the 2023 change in debt fund taxation, gilt funds not take pleasure in indexation advantages. They’re now taxed at your earnings slab price, identical to mounted deposits. For these within the 30% tax bracket, this considerably reduces post-tax returns.
So whereas returns could look engaging earlier than tax, the online profit may not be a lot better than safer, extra predictable options.
So, Ought to You Keep away from Gilt Funds?
Not essentially. Gilt funds can play an vital function in a debt portfolio, particularly when price cuts are anticipated. However the secret’s:
- Don’t make investments blindly primarily based on previous returns
- Perceive your danger tolerance and time horizon
- Know that volatility is a part of the deal, even with “protected” authorities bonds
- Want goal maturity gilt funds if you need extra predictability
- By investing in Gilt Funds you might be simply avoiding the credit score danger. Rate of interest danger is all the time there.
Conclusion –
Gilt funds are sometimes misunderstood. They’re low on credit score danger, however excessive on rate of interest danger. A falling price setting does create alternatives — however solely for many who know what they’re entering into. In case you’re investing simply because everybody else is, or as a result of a fund delivered 10% final yr, hit pause. Perceive the product. In case your purpose is 10+ years, then solely discover.