Gilt funds may start offering higher yields. Time to invest?

Inverse relationship between gilt funds and interest rates

When RBI cuts interest rates, gilt funds deliver higher yield. We’ll give you two examples in the next slide

Examples

When rates were cut in 2020 (Covid), returns from gilt funds shot up to over 12 per cent. When RBI upped the rates, gilt funds’ yields came down to just three per cent.

Why does this happen?

When rates are lowered, the newly issued bonds offer lower yields. The existing bonds’ higher yields start looking more attractive. So, demand of these bonds go up. (Cont.)

Why does this happen?

When the price of existing bonds go up, the performance of debt funds holding them also improves. This is what happens with gilt funds, too.

Is it time to invest in gilt funds?

Now that investors are anticipating interest rates to tumble sometime this year, the question arises whether one should invest in gilt funds for quick gains.

Our verdict on gilt funds

One has to accurately predict the rate movements to profit from these funds. This strategy is risky. At best, only have a tactical or a supplementary allocation to these funds.

What’s the alternative?

Instead, go for high-quality short-duration debt funds. They might offer lower returns but preservation of capital is paramount for fixed-income investors.

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