The RBI’s REPO RATE CUT HAS Made Gilt Mutual Funds Look Attractive, but Blindly Investing Now Can ExposE You to Volatily and Unexpected Losses.
The RBI’s recent repo rate cut has made headlines – and so have Gilt Mutual FundsWhoch Invest Exclusively in Government Securities (80%). With long-term gilt funds showing sharp upward movements, many investors are now tempted to ride the wave. After all, gilt funds are Considered safe in terms of Credit Risk, and with Interest Rates Falling, they see see a no-brainer.
But wait – there’s a lot more benefits. While Gilt Funds Offer High Potential during Falling Interest Rate Cycles, Blindly Investing in Them Without Understanding The Risks Can lead to regret,
Refer to the history repo rate of RBI – RBI Repo Rate History from 2000 to 2025
RBI Rate Cut: Don’T Invest Blindly Into Gilt Mutual Funds!
Why gilt funds are in the spotlight
Gilt Funds Invest in Central Government Securities, which are considered free from default risk. As per the definition of gilt funds, they have to invest 80% of the portfolio in Central Government Bonds. When the RBI Cuts Rates, The Yield on these bonds falls, and their pris people (Price vs bond yield is always in relation) – Essentially the only the maturity. Gilt funds benefit from this risk, which is his recent returns look attractive.
But high returns in the past guarantee future performance – and that’s exactly where the risk lies.
1. Interest Rates Won’t Keep Falling Forever
Gilt funds are highly sensitive to interest rate movements. Yes, The RBI has cut the repo rate now – but future moves depend on inflation, fiscal deficit, global crude prices, and other macro factors. If inflation rises again, or if global conditions tighten, rate cuts may pause – or even reverse.
In that case, long-duration gilts (and funds that hold them) can face Sharp Capital Erosion,
2. Gilt Funds Have High Duration Risk
Gilt Mutual Funds, Especially Long-Duration and 10-Year Constant Maturity Funds, Carry very high durationThat means a small upward move in interest rates can cause Significant Negative ReturnsForget about the 10 year constant maturity funds, if you check the portfolio of many of the available gilt funds, you noticed that the average maturity of these bonds is more than 10 years.
For example:
- A Fund with a modified Duration of 7 could Lose Around 7% in Value If Yields Rise or Fall of Interest Rate by 1%.
- Macaulay Duration is another way of undersrstanding valatiity. Macaulay duration is a measure of How Sensitive a Bond (Or Gilt Fund) is to Interest Rate ChangesThink of it like this: if you invest in a gilt mutual fund, Macaulay Duration Tells you how long (in years) it will take, on average, to get your money back from all the interest payments and the print. But more importantly for investors, The Higher the Duration, The more the Fund’s Value will swing when the interest rates changeSo, when rbi cuts The Repo Rate, Long-Duration Gilt Funds Gain More – their prises shoot up. But if rates go upThese same funds Fall more sharply Than Short-Duration ones. That’s why Blindly Jumping Into High-Duration Gilt Funds after a Rate Cut Can Be Risky-IF Rates Rise Again, You Cold Face Losses.
This Kind of Volativity can be shocking for conservative investors who expected “Safe returns from government bonds.”
3. Past performance is not a reliable indicator
A Common Traap: Seeing Recent 1-Year Returns of 10% or More in Gilt Funds and Assuming the trend will continue. But often, by the time retail investors enter, the bulk of gains are alredy priced in. Bonds Move in anticipation of rate cuts – not just after the fact.
Entering Gilt Funds after a Rate Cut Can Sometimes Mean. Buying HighWhoch Leaves Little Room for Further UPSide.
4. You still need a long investment Horizon
Even thoughts gilt funds carry no credit risk, they are not meant for short-term investors. Their Volativity makes them suitable only for that with at least a 10+ years Horizon,
Hence, exploring gilt funds for your short-term goals is highly risky.
5. Taxation has changed, returns are as attractive as before
With the 2023 change in Debt Fund Taxation, Gilt Funds No Longer Enjoy Indexation Benefits. They are now taxed at your Income Slab RateJust like fixed deposits. For there in the 30% tax bracket, this significant reduces post-tax returns.
So while returns may look attractive before taxThe net benefit might not be much better than safer, more predictable alternatives.
So, Should You Avoid Gilt Funds?
Not Necessarily. Gilt funds can play an important role in a debt portfolio, especially when cuts are expected. But the key is:
- Don’t investment blindly based on past returns
- Undrstand your Risk Tolerance and Time Horizon
- Know That Volatily is Part of the Deal, even with “safe” government bonds
- Prefer Target Maturity Gilt Funds If You Want More Predictcy
- By Investing in Gilt Funds you are just avoiding the creedit risk. Interest Rate Risk is Always there.
Conclusion –
Gilt funds are often misunderstood. They’re low on Credit Risk, but High on Interest Rate RiskA Falling Rate Environment does create options – but only for that who know what they’re geting into. If you’re investment just beCAuse also Else Else is, or trust a fund delivered 10% last year, hit pause. Undrstand the product. If your goal is 10+ years, then only explore.