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What is your view on Gilt funds?

Dhirendra Kumar talks about the interest rate risk in gilt funds

What is your outlook on Gilt funds after the recent rate cuts by RBI?
- Nellore

Gilt funds have been an accidental beneficiary of the crisis. As gilt funds invest in government securities, they are pretty safe and thus, are not prone to the kind of risk that is visible right now. But at the same time, they can also be very volatile. When interest rates go down, these funds appreciate and vice-versa. Given the successive rate cuts, these funds have appreciated substantially. Their one-year returns have been quite unbelievable, standing somewhere around 15 per cent. And given the grim view of RBI, there is still room for it to cut rates further. So, in that sense, if you've been a gilt fund investor, you have been a beneficiary.

But the best time to invest would have been a year ago. Having said that, there is still headroom but mind you this will warrant you not only investing but also selling your gilt fund investments at the appropriate time. This is because once the tides turn and normalcy restores, interest rates will be unlikely to stay this low for all times to come and gilt funds will immediately reflect these changes. And these changes usually come about with great surprises.

The other side of gilt funds is that once interest rates stabilise at lower rates, then gilt funds won't appreciate that much. In fact, they will earn a lower return and may lose in value as well. I would like to add that, many times, gilt funds show declines matching those of equity decline. So, just be prepared for that.

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