My gilt fund investments of Rs. 9.2 lacs were giving me gains of Rs. 0.17 lacs a few weeks ago. But suddenly, the gains are gone and there is a loss of about Rs. 3000. Does it mean that the interest rate cycle is reversing and I should get out fast from these funds?
Very honestly, I don't know but I am more inclined to think that the interest rate cycle is not reversing. But there can still be symptoms or hints by the RBI which make the market more volatile.
While gilts are safe in terms of credit risk, they are not safe from interest rate outlook changes. They can change dramatically. There have been instances in the past when with a rise in interest rates, these funds fell freely. More so, most market participants, including mutual funds, have previously witnessed such surprises in their long-maturity portfolios.
If you remember the Taper Tantrum, it was a very messy situation, everybody was caught by surprise and for the first time in India, we witnessed a situation where liquid funds fell, on a one-day basis, of a scale that had never happened in the past. So, these things can surprise you.
You have to understand the magnitude of the decline here. It is not that your capital will be impaired very substantially, so take a call. Having said that, in my opinion, gilt funds are meant for very sophisticated investors who are willing to bet a little bit.
This article was originally published on September 17, 2020.
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