Government bonds are one of the safest investment options. Two important factors that make them stand apart are trustworthiness since they are issued by the government and the fact that they are not market-linked. This makes government bonds a favourite investment option for many conservative investors.
At the same time, similar to investing in stocks manually, finding and investing in bonds that match your risk appetite and goals could be a chore. Luckily, there are mutual funds for that too. They are called gilt funds, and they solely invest in government bonds. Read on to learn more about government bonds and gilt funds.
What are government bonds?
Bonds are a type of financial security that can be issued by governments or corporations when they want to raise funds. When an investor invests in a bond, they effectively lend money to the bond issuer. The issuer commits to pay the investor interest during the bond period and to repay the investor’s principal, which is the initial investment, after the bond term.
Government bonds are bonds that governments issue to finance the activities of the government. Investors in these bonds lend money to the government, and in exchange, the government pledges to pay interest until the bond matures and to repay the principal at the end of the period. Bonds issued by the government often carry a lower risk level than corporate bonds since governments are typically more dependable than corporations in terms of the repayment of principal and interest.
What are gilt funds?
Gilt funds, often known as government bond funds, are mutual funds that only invest in government bonds. Investing in gilt funds allows investors to diversify their portfolios by investing in various government bonds rather than selecting and investing in individual bonds. Furthermore, gilt funds are managed by professional fund managers with the expertise and resources to make strategic investment decisions, which can assist investors in decreasing risk.
What is the RBI interest rate?
The Reserve Bank of India (RBI) interest rate refers to the RBI’s policy repo rate, which is the rate at which financial institutions can borrow money from the central bank. The RBI employs this rate as a tool to regulate inflation and control the country’s overall monetary policy.
When the RBI raises interest rates, commercial banks’ borrowing costs rise, raising the cost of borrowing for consumers and businesses. This can lead to a reduction in spending and investment, which can help to curb inflation. However, it also implies that fixed-income products such as bonds become more appealing to investors because they give a higher yield than before.
Are gilt funds a good investment during interest rate hikes?
Bond prices tend to fall when interest rates rise because the value of the bond’s fixed coupon payments decreases relative to the new higher interest rate environment. Bond yields rise as a result, making new bonds more appealing to investors and older bonds less appealing. On the other hand, when interest rates fall, bond prices tend to climb and bond yields fall, making older bonds more appealing to investors.
Thus, gilt funds can be a good option during times of interest rate hikes if the fund invests in newer bonds. But if the fund has older bonds with older interest rates, the increase in interest rate will not benefit the investor.
Conclusion
Interest rate hikes are a good indicator to invest in gilt funds that invest in newer bonds. But at the same time, this should not be the only consideration. Instead, investing according to the investor’s financial goals and risk appetite is also important.