The RBI’s repo price lower has made gilt mutual funds look engaging, however blindly investing now can expose you to volatility and sudden 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 are actually tempted to trip the wave. In any case, gilt funds are thought-about protected 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 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 price of RBI – RBI Repo Rate History from 2000 to 2025

RBI Fee 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-about 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 (value 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 danger lies.

1. Curiosity Charges Received’t Preserve Falling Eternally

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 Length Threat

Gilt mutual funds, particularly long-duration and 10-year fixed maturity funds, carry very excessive period. Meaning a small upward transfer in rates of interest could cause important destructive returns. Overlook in regards to the 10 yr fixed maturity funds, when you test the portfolio of most of the obtainable 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 means 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 refund 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 price, long-duration gilt funds acquire 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 lower may be dangerous — if charges rise once more, you possibly can face losses.

This type of volatility may be stunning for conservative buyers who anticipated “protected returns from authorities bonds.”

3. Previous Efficiency Is Not a Dependable Indicator

A typical lure: 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 very 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 not less than a ten+ years horizon.

Therefore, exploring gilt funds to your short-term objectives 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 now not get pleasure from indexation advantages. They’re now taxed at your revenue slab price, identical to mounted deposits. For these within the 30% tax bracket, this considerably reduces post-tax returns.

So whereas returns might look engaging earlier than tax, the online profit may not be significantly better than safer, extra predictable options.

So, Ought to You Keep away from Gilt Funds?

Not essentially. Gilt funds can play an necessary position in a debt portfolio, particularly when price cuts are anticipated. However the bottom line 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 “protected” authorities bonds
• Desire goal maturity gilt funds if you need extra predictability
• By investing in Gilt Funds you’re 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 setting does create alternatives — however solely for individuals 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 aim is 10+ years, then solely discover.