Dhirendra Kumar sheds light on the interest rate risk in gilt funds
I am planning to buy SBI Magnum Gilt Fund. Should I go for it?
I would upfront suggest that you read my column on gilt funds. In the column, I have highlighted why and how gilt funds have become an island of outperformance in a fairly accidental way.
People intuitively think that gilt funds are very safe. But these funds can also be very volatile, as they reflect on changes in the interest rate outlook that, too, very rapidly. This is because their underlying, i.e. g-secs, reacts sharply to any changes in the interest rate, as they have a very wide, active and vibrant market and it shows in the valuation immediately.
When interest rates go down, gilt funds appreciate and vice-versa. Given the successive rate cuts, these funds have appreciated substantially. But a small uptick in interest rates and a long maturity gilt fund would crash. So, be wary of the volatile nature of these funds. I've come across people who have lost a substantial amount of money in gilt funds while chasing the recent performance during a falling interest-rates setup. So, just be conscious of this volatile nature before investing in gilt funds.