Widely read:
Gilt funds are schemes that invest in government securities (G-Secs), issued by the Reserve Bank of India on behalf of the government. As these are sovereign papers, they do not expose investors to any credit risk. Although, it is institutions that mostly invest in gilt funds, it is an investment option for retail investors that they could consider. Although, investments in these schemes are not exposed to credit risk, the investments are risky given the frequent trading witnessed in G-Secs. It is for this reason, that gilt funds are highly sensitive to interest rate movements.
The inverse relationship between bond prices and interest rates works well when investing in these funds in a falling rate regime. In a falling interest rate scenario, these funds do well. Likewise, in a rising interest rate scenario; these funds lose out. Moreover, in the short term, there is a possibility of losses from investments in these funds as the returns from these funds swing wildly in the short term depending on the change in the prevailing interest rates. It is for this reason that these funds should not be part of a portfolio's core holdings. Investments in these funds should be done for tactical gains in the short run and only if one has the discipline to do so.
Disclaimer: This content is for information only and should not be considered investment advice or a recommendation.
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