What Are Gilt Funds?

February 16, 2015 Gilt Funds 2 min read
Equity in Debt – Decoding GILT funds

As they say stock markets are full of opportunity, one simply needs to hunt that down and invest, a similar opportunity is what I would like to discuss today, which has a blend of risk, return and opportunity and is more of a cyclical product (turns with the economic conditions) known as GILT funds.

What is guilt funds a share trader should know

GILT funds are a pure Debt mutual funds which invest in Government security bonds of different maturity and interest rates, but interestingly enough we have seen huge volatility and changes in the yield of GILT funds in past years or so, which makes it an interesting equity play within the Debt basket, lets understand how:

Every government bond comes with a coupon rate so if a Government bond is written as ‘8.3% GOI ‘ which states that this bond gives an annual yield of 8.3%. Now the GILT funds by AMCs pick up and keep these Bonds time to time as they feel the Bond is giving more returns as compared to the existing holdings in the corpus.

Now if the government reduces the interest rate by 50 basis points (0.50%) this will encourage the fund manages to buy the older bonds which have a higher coupon rate then the current available GOI bonds, post the interest rate cut, and the bond prices, similar to share prices tend to increase as the demand outweighs the supply in the stock market.

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This is where the returns are generated in these GILT funds, traditionally a GILT fund is understood ( rather misunderstood) as a fixed interest low volatile investment product but if we go back to the performance record of lets say ICICI Prudential Gilt Fund – Investment Plan – PF Option – Regular Plana GILT fund , the fund has given returns of 47.43% a year from Jan 03, 2008 – Jan 02, 2009 ( purely a falling interest rate regime) but has also gone into the NEGATIVE yearly return or – 4.71%  from Jan 02, 2009 – Jan 04, 2010 ( a rising interest rate duration) and -12.28% quarterly losses from May 20, 2013 – Aug 19, 2013

Also Read : Decoding Arbitrage Funds

So which makes the ALPHA (a risk measured return above the nominal return rate) too much active and alive in these GILT funds.

As an investor if you really can feel and understand the interest rate cycle and think that the interest rate and inflation both will fall in coming times, it is a good time to buy the GILT fund which gives an experience (both risk and return) of an equity instrument while sitting in the pure Debt basket of the mutual fund

It is also imperative to remember the new tax rules which makes 3 year investment compulsory in order to take the Long term capital gain indexation benefit in Debt funds.

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  • What is an Exchange Traded Funds (ETF)? | Trade Smart Online says:

    […] Also Read: Equity in Debt – Decoding GILT funds […]


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