When RBI cuts interest rates, gilt funds deliver higher yield. We’ll give you two examples in the next slide
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.
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.)
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.
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.
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.
Instead, go for high-quality short-duration debt funds. They might offer lower returns but preservation of capital is paramount for fixed-income investors.