Gilt Mutual Fund return

I have noticed that almost all gsec/gilt funds have cagr of 9-10% for the period of last 5 years.
But in last one year their return is only 5%. Despite slashing bank rates. Any specific reason?

This is happening because the interest rates have stopped falling. There have been record outflows from gilt funds since December due to this -

In case you are interested, this post explains about how gilt funds work in much more detail -

Only around April, gilt funds started seeing higher inflows as there was a possibility that interest rates might decline further due to the central bank continuing with the accommodative stance as long as necessary (article).

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Hello @Prayag could you please explain a little bit more about why falling interest rates will improve gilt fund returns. As they hold government securities, falling interest rates mean there will be less interest they get, and hence reinvest less money. I am a novice… Please don’t mind if I am not making sense. Thanks!

Most of the Mutual funds hold long term gilt. Rate is not floating, so if current interest rate falls, value of the holdings increases to decrease the effective yield. If current gilt is say 5% and fund had bought at 6%, then value of gilt holdings must increase so that effective yield goes from 6 to 5% for anyone buying today.

Else you give free money to anyone buying gilt from market at 6% yield when fresh gilts are giving 5%.
And vv.

For short term gilt this effect would be less, but i think short term gilt as a category has disappeared from mutual funds unfortunately…

Just google - how bonds moves on interest rate changes

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I too hold long term gilts and 2021 was not a great year for me. Even this year the volatility seems too high.

Varsity has great module explaining this relation between interest rates and price of bond. You can have a look to understand the concept