GILT Funds – A mixed bag of news - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks


Login Failure
(Please do not use this option on a public machine)
  Sign Up | Forgot Password?  

GILT Funds – A mixed bag of news

Apr 4, 2000

The cut in the bank rate (BR) and cash reserve ratio (CRR) could not have come at a better time for the government securities funds, which have under performed most other mutual fund schemes. However, will the boom in government securities last? The government has been consistently trying to talk down interest rates with a view to reduce borrowing costs for the manufacturing sector (which has yet to see a significant pick up in investment activity). First it reduced the minimum return stipulated under the provident fund schemes and then it withdrew the interest tax. However, finally it was the Reserve Bank of India’s (RBI) decision to cut the CRR and the BR that resulted in banks reducing interest rates.

All along this period GILT (government securities) funds witnessed volatility in GILT prices as expectations of rate cuts ebbed and flowed. By the time, the rate cuts were announced, the discounting was all but complete.

Why is a cut in the interest rates good news for GILT funds? Well, when interest rates are reduced, so are the expectations of investors i.e. they are willing to settle for a lower yield (implying higher bond prices) as opportunity costs are lower. Look at it from the technical point of view – Suppose the 10 year government bond (risk free) is yielding 8%, and interest rates are 12%. When the rates reduce to say 11%, the 10 year bond will become relatively more attractive thus driving investor interest. In such a scenario bond prices would move up and the implied yield would decline so that it becomes relatively neutral.

Therefore ideally speaking, the GILT funds would benefit as higher GILT prices would imply a higher net asset value (NAV). However, in realty, the situation may not turn out like this.

And this is because of the Central Government's huge fiscal deficit of Rs 1,100 bn that needs to be financed from borrowed funds. Such a large deficit implies that the supply of government paper, in relation to demand for the same, is likely to be high (thus driving down bond prices). Net result – probably higher yields (lower bond prices).

The performance of the GILT funds is directly related to the government's borrowing program and given the existing fiscal position of the centre, the prospects are not too rosy. But then again, investing in a risk free security has its benefits – an investor on the NASDAQ would know that.

Equitymaster requests your view! Post a comment on "GILT Funds – A mixed bag of news". Click here!


More Views on News

Sorry! There are no related views on news for this company/sector.

Most Popular

India: Recovery Stalled by Vaccine Games? (The Honest Truth)

Apr 13, 2021

Ajit Dayal on how India's vaccine strategy will impact the markets.

4 Stocks to Make Your Portfolio Immune to the Second Covid Wave (Profit Hunter)

Apr 6, 2021

Rather than predicting the market, successful investing is more about preparing well and placing your bets accordingly.

An India Revival Stock I'm Bullish On... (Profit Hunter)

Apr 9, 2021

This could take India to the position of 3rd largest economy.

Why Did the Market Crash on Monday? (Fast Profits Daily)

Apr 13, 2021

In this video, I'll you what I think is the real reason behind yesterday's market crash.

A Unique Sector for Short-Term Profits (Fast Profits Daily)

Apr 12, 2021

This ignored sector could deliver big short-term profits.


India's #1 Trader
Reveals His Secrets

Secret To Increasing Your Trading Profits Today
Get this Special Report,
The Secret to Increasing Your Trading Profits Today, Now!
We will never sell or rent your email id.
Please read our Terms