Why This Is The Right Time To Invest In Gilt Funds

Interest rates play an important role in the economy and also affect your investments. And how interest rates play out depend on how the Reserve Bank of India (RBI) sets the rate in its monetary policy committee meetings which happens at least four times a year.

Based on the ground realities, experts and analysts take a call on whether the RBI is expected to increase or decrease the interest rates or whether to keep it the same. The RBI has kept its repo rate at 6.5 per cent for more than a year now. And it is expected to reduce rates going ahead. And when that happens, certain investment opportunities open up for investors. And investing in gilt mutual funds is one such option. Let us take a look at why.

What Are Gilt Mutual Funds?

Gilt mutual funds are essentially debt funds which mainly invest in Government securities. Since these funds are backed by the Government, the risk on them is negligible. However, these funds are affected by the change in interest rates.

Gilt funds and interest rates have an inverse relationship. Let us assume that the interest rate goes up. In that case the newly issued government bonds offer a higher coupon interest rate. So older bonds, held by gilt funds lose their value because they have a lower coupon rate. For this reason, the prices of older bonds go down.

On the other hand, when interest rates fall, new bonds lose their attractiveness as the coupon rates are low. Older bonds which are held by gilt mutual funds and have a higher coupon rate become more attractive. So the demand for these bonds rises and hence their price goes up.

Where Are Interest Rates Headed?

"The expectation is that RBI may not cut rates this year. There are several reasons behind this. The gross domestic product (GDP) is growing at seven per cent level and the food inflation continues to remain high. What RBI is actually looking at is how global growth actually pans out. Once global growth weakens, our growth also is expected to come down. Then once we reach around four half levels on consumer price index (CPI) inflation, RBI may be tempted to cut rates," says Murthy Nagarajan, Head-fixed income, Tata Asset Management.

Definitely their focus of RBI will be more towards keeping inflation in check. Once they have brought CPI inflation closer to 4 per cent level, they will not want to fritter it away.

"The next move, as far as rates are concerned, may be a rate cut, whether it happens after six months or after one year, we don't know, but the next move may be rate cut," says Murthy.

Should you invest?

Should you invest in gilt funds?  "With anticipated rate cuts over the next one to two years, the current interest rate situation offers a tactical chance. Investing in high duration gilt funds could potentially capitalise on bond price increases resulting from declining yields," says Raghvendra Nath, MD, Ladderup Wealth Management.

Agrees Anooshka Soham Bathwal, Founder and CEO of Dhanvesttor, a financial planning firm, "In the medium run, when central banks will start trimming rates, more benefits may accrue. With this, we believe that it will be a good time to accumulate these funds. One can choose a fund based on his/her financial goals."

With interest rates expected to fall, now is a good time to consider gilt funds. But remember, consult a financial advisor before investing.
 

Anagh Pal

BW Reporters