Are Gilt funds Safe? Should you invest in gilt funds? - A complete guide

Of the several mutual fund's product categories available in the market, gilt funds are probably the least understood product category. Many retail investors stay away from gilt funds and many others have wrong strategies when investing in gilt mutual funds. Gilt funds invest in Government securities or bonds with varying maturities.

Misconceptions about Gilt Funds:

Gilt Funds are Risk-free investments: While the Government securities themselves are risk-free with respect to interest and principal payments, the price of the securities fluctuates with changes in the yields or interest rates.

Gilt Funds are as risky as equity funds: Gilt Funds are more volatile than other debt fund categories because if interest rates go up, the NAVs of gilt funds will decline and it is even possible to get negative returns in the short term. However, unlike Equity funds, Gilt funds will secure the principal amount at least.

Now that you are aware of the concept of Gilt Funds let’s take a look at their feasibility as investments.

Reasons to Invest in Gilt Funds

The 10-year Gilt yield has been on a decline from around 9% from 2014 onwards. There are several macro-economic reasons for the decline and there are enough reasons to believe that it will continue to decline further.

Lower Fiscal Deficit: As per the latest economic estimates, the Government is on track to meet its fiscal deficit target this financial year. Lower the fiscal deficit, lesser is the Government’s need to borrow money and hence, we can see lower yields and higher Gilt prices in the future.

Lower Inflation: Inflation has a direct impact on Gilt yields. Lower inflation will encourage the RBI to further reduce repo rates to stimulate demand in the economy. Falling crude prices have lowered Wholesale Price Inflation considerably this year. The long-term inflation target of 5% is also achievable, albeit there are certain risks of not meeting it.

Accommodative Monetary Policy Stance of RBI: The RBI is committed to reducing interest rates, to spur economic growth, provided inflation remains in check within the policy parameters. This augurs well for Gilt Fund investors in the long term, the short-term volatility not withstanding.

Indian economy is structurally strong: A number of global reports have suggested that the Indian economy is structurally strong, at a time when the global economy is going through a period of tumult. In fact, many reports from leading institutions have predicted that India will be a strong outperformer, in terms of GDP growth over the next few years. This will put lower pressure on fiscal deficit and consequently Gilt yields.

That the macros of the Indian economy are strengthening over the past few years is evidenced by the returns of Gilt Funds over the last 3 to 5 years. Top performing Gilt Funds have given excellent returns over the past three to five years.

In a nutshell

Given that there are widespread expectations for the interest rates to fall in the coming quarters, you could do well by investing in gilt funds.

But remember, you would need to move out before the rate reversal. If you are comfortable tracking and analysing the trajectory of interest rates, you can consider investing in gilt funds opportunistically. For most other retail investors who find it too difficult, other types of debt funds are a better option.