The RBI’s repo charge lower has made gilt mutual funds look enticing, however blindly investing now can expose you to volatility and sudden losses.
The RBI’s latest repo charge lower has made headlines — and so have gilt mutual fundswhich make investments solely in authorities securities (80%). With long-term gilt funds exhibiting sharp upward actions, many traders are actually tempted to journey the wave. In any case, gilt funds are thought of 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.
Check 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 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 at all times inverse in relation) — particularly those with lengthy maturities. Gilt funds profit from this rise, which is why their latest returns look enticing.
However excessive returns previously don’t assure future efficiency — and that’s precisely the place the danger lies.
1. Curiosity Charges Received’t Maintain Falling Without end
Gilt funds are extremely delicate to rate of interest actions. Sure, the RBI has lower the repo charge now — however future strikes depend upon inflation, fiscal deficit, world crude costs, and different macro components. If inflation rises once more, or if world situations tighten, charge 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 period. Which means a small upward transfer in rates of interest could cause important destructive returns. Overlook in regards to the 10 yr fixed maturity funds, for those who test the portfolio of most of the obtainable gilt funds, you seen that the common 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 Period is a measure of how delicate a bond (or gilt fund) is to rate of interest modifications. Consider it like this: In case you put money into a gilt mutual fund, Macaulay Period tells you ways lengthy (in years) it can take, on common, to get your a reimbursement from all of the curiosity funds and the principal. However extra importantly for traders, 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 upthese similar funds fall extra sharply than short-duration ones. That’s why blindly leaping into high-duration gilt funds after a charge lower may be dangerous — if charges rise once more, you might face losses.
This sort of volatility may be surprising for conservative traders who anticipated “protected returns from authorities bonds.”
3. Previous Efficiency Is Not a Dependable Indicator
A typical lure: Seeing latest 1-year returns of 10% or extra in gilt funds and assuming the pattern will proceed. However usually, by the point retail traders enter, the majority of positive aspects are already priced in. Bonds transfer in anticipation of charge cuts — not simply after the actual fact.
Getting into gilt funds after a charge lower can typically imply shopping for excessivewhich leaves little room for additional upside.
4. You Nonetheless Want a Lengthy Funding Horizon
Though gilt funds carry no credit score threat, they aren’t meant for short-term traders. Their volatility makes them appropriate just for these with at the very least a ten+ years horizon.
Therefore, exploring gilt funds in your short-term objectives is extremely dangerous.
5. Taxation Has Modified, Returns Aren’t as Enticing 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 earnings slab chargesimilar to mounted deposits. For these within the 30% tax bracket, this considerably reduces post-tax returns.
So whereas returns might look enticing earlier than taxthe web profit won’t be significantly better than safer, extra predictable options.
So, Ought to You Keep away from Gilt Funds?
Not essentially. Gilt funds can play an essential position in a debt portfolio, particularly when charge cuts are anticipated. However the secret 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
- Choose goal maturity gilt funds if you’d like extra predictability
- By investing in Gilt Funds you’re simply avoiding the credit score threat. Rate of interest threat is at all times there.
Conclusion –
Gilt funds are sometimes misunderstood. They’re low on credit score threat, however excessive on rate of interest threat. A falling charge setting does create alternatives — however solely for individuals who know what they’re stepping 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 objective is 10+ years, then solely discover.