The RBI’s repo price lower has made gilt mutual funds look enticing, however blindly investing now can expose you to volatility and surprising losses.
The RBI’s current repo price lower has made headlines — and so have gilt mutual funds, which make investments solely in authorities securities (80%). With long-term gilt funds displaying sharp upward actions, many buyers at the moment are tempted to experience the wave. In any case, gilt funds are thought of secure by way of credit score threat, 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.
Check with the historic repo price of RBI – RBI Repo Price Historical past from 2000 to 2025
RBI Price Reduce: 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 threat. 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 all the time 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 chance lies.
1. Curiosity Charges Gained’t Maintain Falling Without end
Gilt funds are extremely delicate to rate of interest actions. Sure, the RBI has lower the repo price now — however future strikes rely upon inflation, fiscal deficit, international crude costs, and different macro components. If inflation rises once more, or if international situations tighten, price cuts might 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 Period Danger
Gilt mutual funds, particularly long-duration and 10-year fixed maturity funds, carry very excessive length. Meaning a small upward transfer in rates of interest may cause important destructive returns. Overlook in regards to the 10 12 months fixed maturity funds, should you test the portfolio of most of the accessible gilt funds, you observed that the common 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 approach of understanding volatility. Macaulay Period is a measure of how delicate a bond (or gilt fund) is to rate of interest modifications. Consider it like this: When you put money into a gilt mutual fund, Macaulay Period 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 acquire 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 price lower will be dangerous — if charges rise once more, you may face losses.
This sort of volatility will 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 beneficial properties are already priced in. Bonds transfer in anticipation of price cuts — not simply after the actual fact.
Coming into gilt funds after a price lower can generally imply shopping for excessive, which leaves little room for additional upside.
4. You Nonetheless Want a Lengthy Funding Horizon
Although gilt funds carry no credit score threat, they aren’t 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 in your short-term targets is extremely 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 earnings slab price, identical to fastened deposits. For these within the 30% tax bracket, this considerably reduces post-tax returns.
So whereas returns might look enticing earlier than tax, the web profit may not 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 essential function in a debt portfolio, particularly when price cuts are anticipated. However the hot button is:
- Don’t make investments blindly based mostly on previous returns
- Perceive your threat tolerance and time horizon
- Know that volatility is a part of the deal, even with “secure” authorities bonds
- Choose goal maturity gilt funds if you’d like extra predictability
- By investing in Gilt Funds you might be simply avoiding the credit score threat. Rate of interest threat is all the time there.
Conclusion –
Gilt funds are sometimes misunderstood. They’re low on credit score threat, however excessive on rate of interest threat. A falling price surroundings does create alternatives — however solely for many who know what they’re moving into. When you’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 aim is 10+ years, then solely discover.
