Gilt Mutual Funds are best bet during fall in interest rates

Gilt Mutual Funds are best bet during fall in interest rateGilt Mutual Funds are best bet during fall in interest rates

Rising economic conditions would provide various opportunities for investment. However, what happens when there is economic meltdown like it happened in 2008? Is there any investment option which gives better returns during falling interest rates? Gilt Mutual fund is the answer for such questions. In this article, I would elaborate what are Gilt Mutual Funds, should you invest in such gilt mutual funds and under which economic conditions, investment in such mutual funds are beneficial.


Also read: Should you opt international / Global Mutual funds?

What are Gilt Mutual funds?

Gilt Mutual funds invest in Government securities (issued by Reserve Bank of India), corporate bonds, zero coupon bonds, treasury bills, certificate of deposits, commercial papers etc. Investment in such opportunities can be done by large players. Retail players cannot invest in majority of them. These government securities or bonds have a fixed interest rate or coupon rates and they are payable annually or at maturity. These bonds are issued for 3 to 20 years time frame. The bond prices would typically goes up when interest rate goes down and vice versa.

How Gilt mutual funds work?

When Gilt mutual funds invest in such Government securities or bonds, they would get impacted in various ways.

  1. They would gain with interest rates which are paid annually or at maturity.
  2. When interest rates goes down, bond prices goes up. This is due to the fact that interest rates are fixed and hence investing in such bonds would provide higher interest rates comparing to market (where interest rates have been reduced).
  3. On the other hand, when interest rate goes up, bond prices go down.

Gilt Mutual funds would en-cash opportunities specified in point no.1 and 2 and provide higher returns compared to fixed deposits.

What is the ideal tenure to invest in such Gilt Mutual funds?

Gilt Mutual funds should be invested in a medium term period of 3 to 5 years to gain good returns.

When should you invest in Gilt Mutual funds?

Gilt mutual funds invest in government securities or bonds. When RBI reduces repo rate, interest rates would fall and bond prices would increases. Gilt Mutual funds which holds such bonds would get higher returns with this move.

On the other side, when RBI increases the repo rate, interest rates would increase and gilt mutual funds would suffer due to fall in bond prices.

You can invest in Gilt mutual funds during the following economic conditions:

  • Interest rates are at peak level. In such a situation there is more likely that RBI would reduce repo rate and interest rates would fall and bond prices would increase
  • Government is planning to take steps to reduce inflation. To reduce inflation, the measures would include lowering the interest rates and bond prices would increase.
  • During economic slowdown the way it happened in 2008. During such economic condition, Government would come up with special packages and pump-in money to boost the economy which includes lowering the interest rates. There would be good demand for bonds and the prices for such bonds would go up.

Also read: Should you opt for Capital Protection funds?

Best Gilt Mutual funds based on 3 to 5 years performance

Gilt Mutual Funds are best bet during fall in interest rates

Conclusion: Gilt Mutual funds are good during falling interest rates. Don’t get tempted looking at the returns of 1 year and invest. There are situations where such Gilt mutual funds have provided negative returns due to raise in interest rates. You should know when to get-in and when to get-out of such mutual funds. Invest in these Gilt Mutual funds if you are looking for medium term investment of 3 to 5 years. 

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Gilt Mutual Funds are best bet during fall in interest rates

Suresh KP


    1. Shiv, I said they are best best during falling in interest rates scenario. Now the interest rates are still high. Small dip in interest rate cannot be called as fall. 

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