The Rise of Gilt Funds: Exploring an Attractive Investment Opportunity

In June 2023, gilt funds experienced a notable shift in investor sentiment. After a brief decline in May, these funds saw net inflows of Rs 396 crore, indicating a renewed interest among investors. This resurgence raises the question: Is it a good time to consider investing in gilt funds?

Key Highlights On Gilt Funds

  1. Gilt funds are mutual funds that primarily invest in government securities, offering lower risk and stable returns.
  2. Gilt mutual funds provide exposure to government-backed securities, benefiting from the financing of developmental projects.
  3. Gilt funds become more attractive as the benchmark 10-year government security yields fluctuate and investors seek the benefits of indexation.
  4. Factors such as inflation expectations influence the movement of 10-year benchmark bond yields.
  5. In March 2023, there was a surge in interest and inflows into gilt funds due to the expiration of indexation benefits and concessional tax rates.
  6. Investors should consider their risk tolerance and opt for a long-term investment horizon to effectively manage volatility when investing in gilt funds.

What are Gilt Funds

Gilt funds are mutual funds that primarily invest in government securities. They offer relatively lower risk and can be attractive to investors looking for stable returns.

Gilt mutual funds are specifically designed to invest in government bonds and securities issued by the RBI on behalf of the Central government. These funds adhere to SEBI regulations, which require them to allocate a minimum of 80% of their assets to such instruments. This ensures that investors in gilt funds have significant exposure to government-backed securities and can potentially benefit from the financing of developmental projects.

These funds provide a low-risk option for investors seeking stability and steady returns. By investing in gilt funds, individuals can participate in the performance of government bonds while benefiting from professional fund management.

Understanding Yields: How Gilt Funds Become More Attractive

To grasp the appeal of gilt funds, it’s crucial to understand the concept of yields. The benchmark 10-year government security yield, which reached 7.42 percent on February 28, 2023, started declining as investors turned to long-term gilts through mutual funds, attracted by the benefits of indexation. After a temporary surge in demand, the yields have bounced back, making gilt funds more enticing.

Factors Influencing 10-Year Benchmark Bond Yields

Several factors influence the movement of 10-year benchmark bond yields, including inflation expectations. Market participants and the Reserve Bank of India expect inflation to remain steady, which has led to the central bank maintaining policy interest rates.

Rising Interest in Gilt Mutual Funds in India: March 2023 Inflows and Returns

March 2023 witnessed substantial net inflows of Rs 4,430 crore into gilt funds. This surge in interest can be attributed to the expiration of the indexation benefit and the concessional tax rate on long-term capital gains for debt fund units sold after three years. Additionally, falling long-term bond yields enticed some investors towards these funds. Gilt funds, as a category, have delivered a 6.89 percent return over the past year, as per Value Research.

Managing Volatility: Gilt Funds, Duration, and Long-Term Investment

Gilt funds invest in government bonds, with the fund manager determining the duration based on their interest rate outlook. On average, the time to maturity and modified duration of gilt funds stand at 5.68 years and 3.97 years, respectively, as of June 30, 2023.

However, it’s important to note that some schemes have an average time to maturity as high as 9 years, making them more sensitive to interest rate changes. 

What Should Investors and Traders Do? 

Despite the inflows into gilt funds, investors and traders should act wisely and make sure they do proper research before choosing to invest in them.  

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With renewed investor interest and attractive yields, gilt funds have emerged as an appealing investment option. However, investors should consider their risk tolerance and opt for a long-term investment horizon to navigate volatility effectively.



Disclaimer: Investments in the securities market are subject to market risks; read all the related documents carefully before investing.