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Interest Rates & Gilt Funds

Parthan wants to know the future outlook of gilt funds & asks if their attractive yields will continue

Given the current falling interest rate scenario, do gilt funds form a better option on a 6-month time horizon than Bank FDs? A 1-3 year FD (post-tax) will yield 6.67 per cent (max) and your site shows attractive yield for gilt funds now. Is there any additional risk or any potential liquidity issue for gilt funds if there are redemption pressures?
- Parthan

In a falling interest rate scenario, the yield of gilt funds fall and in turn their prices go up. Gilts will benefit if the interest rates continue to soften. But it is to be noted that the interest rates have been falling for quite some time now. Also, the yield on gilts is not a smooth line. They constitute a highly traded segment and are highly volatile.

In case a redemption pressure arises in the future, the liquidity of the underlying instruments and the value realized would depend on their prices at that time. So, one must be prepared for any turbulence that may occur due to their sensitivity to interest rate outlook.

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