GILT funds are the debt mutual funds that are invested over G-SEC bonds. These bonds are classified as the high grade Government bonds with various lock-in periods. These bonds and funds have high credibility among debt market investors.

These are the only debt funds which have no credit and liquidity risk. The only risk related is interest rate risk and it can equalize with long term investments.

In the last one week, the GILT fund has shown a 2% drop in its continuous performance of the last 6 months. Especially in 10-Years bond, the drop was seen more than 1%.

The impact has seen in corporate, dynamic and public sector bank debt funds which had a lock-in period of more than 4 years.

Debt funds like liquid, ultra-short term, overnight funds didn’t had any impact.



10 year bond yeild

 Source: Trading Economics

Once, the RBI cut down the REPO RATE from 6% to 4% due to the COVID-19 crisis. At the same time to balance the EMI moratorium and to ensure the liquidity by offering loans, the repo rates were cut down.

As RBI declares the cut down in interest rate, the existing G-Sec bonds were attracted by many investors. This made the 10-Y bond yield to come down from 6.5 of April to 5.71 in august.

As the bond yield decreases, the bond interest rate sharply increased. The 10-Y GILT funds have shown a growth of 14% in the last 5 months.

Note: Bond Yield and Interest rate are inversely proportional.


In the last week, the GILT funds along with another medium and long lock-in period debt funds dropped sharply.

The bond yield moved very aggressively from 5.71 to 6.22. At the same time, RBI bought few 10-Y bonds, and currently, the bond yield is at 6.1.




A few weeks earlier we have written an article on the Inflation rate that has spiked up to 6.93%. Recently RBI governor has stated the expected Inflation rate will move higher than 10%.

Whenever the inflation rate spikes up, RBI has to increase the repo rate. If not the economic condition will become stagflation and this will lead to many unemployment.

As this was the hot hike over investor’s minds, they were eager in selling the bond. The bond yield will shoot up when the repo rate increases.

So, the inflation rate was an important reason for the GILT fund to dropdown.

Even in this situation, the Nifty P/E keeps on shooting at a high peak at 32.67 times to the earnings. Equity market analysts have opened up their mind that, the debt market fall will have an impact the equity market too.

So, investors can wait for the right opportunity in the equity market and stay out for some period.




When the situation happened in the debt market and many investors redeemed the investments, RBI intervened.

RBI has bought many 10-Y G-SEC bonds from debt funds controlling AMC and maintained the demand in the market.

In effect to this act of RBI, the bond yield has come down again in the last three days. From 6.22 to 6.1, this has again shifted in the growth phase.

This is not sure to continue its legacy as the inflation rate is hiking up. RBI has to increase the Repo rate, eventually, the bond yield will move up and funds will fall.

We are not sure of when these things will happen, but this will happen for sure. So, short term investors of G-Sec bonds should quit and book profit.




With respect to GILT funds, many mid-term and long term bond holding debt funds have seen up to a 2% drop in NAV.

In terms of short term funds which has maturity period less than 3 years, this impact was not shown and NAV still continues to grow.

In our earlier articles, we were advising investors to deposit and rebalance with the help of liquid and ultra-short fund. These funds are still providing a 7-8% return.

Those investors who aimed at holding for long period such as 10 years, still should hold as the volatility will minimize.

This fall in debt funds will surely make in the equity market and it is highly valued. The P/E of nifty is an all-time high. Investors should use this time to rebalance their investment and asset allocation.




·       As inflation rate increase, the repo rate should be increased. Or else, we might end up with stagflation.

·       If repo rates increase, the bank yield also increases. Eventually, the debt funds NAV will fall and it happened last week.

·       RBI bought enough 10-Y G-Sec bonds to keep up the demand normal. This made the fund’s NAV to shoot back.

·       If planning GILT funds for the long term, you can still hold the funds.

·       If not, please invest in liquid funds and ultra-short funds. Even investors have turned their eye over debt funds.


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