GILT vs Liquid mutual funds

[Prabhakar_MC]

Currently I have invested in Liquid Mutual Funds (Growth) and I’m considering switching to GILT funds for higher returns (>9%).

Does it make sense to buy GILT funds now by selling liquid mutual funds?

[Bhuvan]

Comparing liquid funds with Gilt funds is not right. Liquid funds are short term debt funds and their returns will be more or less FD+. Gilt funds, on the other hand, are long duration debt funds with a higher duration or interest rate risk. Meaning, they are more sensitive to interest rate changes and are more volatile compared to liquid funds. When interest rates go up, they fall more than liquid funds, and when rates fall, they gain more than debt funds.

So, your decision should be based on that. Also, 9%+ isn’t guaranteed It depends on interest rates.

TLDR:

1. Liquid funds are short term debt funds that have a predictable return profile. They are less sensitive to interest rate changes.
2. Gilt funds are longer term debt funds and are more volatile and sensitive to interest rate changes.
3. Buying gilt funds is a bet in interest rates going down.

A quick explainer on the basics of investing in debt mutual funds

Debt funds play an important role in your asset allocation. Since debt funds are relatively less risky than equities, they help reduce the volatility in your portfolio by providing stability. They are less risky, but not riskless. There are a few key risks you need to understand. The first key risk you need to know is interest rate risk. Bonds and, by extension, debt funds have an inverse relationship with interest rates. When interest rates rise, bond prices fall. The reason is that if intere…

[Prabhakar_MC]

If I hold the GILT funds for long duration say 10 years, I can nullify the interest rate risk, right?
For example, I buy SBI Magnum GILT fund now at current NAV of 63 for 1 lakh rupees. Am I not locking in the current 10 year yield of 7%? I understand there will be NAV fluctuations in the short term, but after 10 years, isn’t it guaranteed to generate 7% CAGR? At this rate after 10 years, the NAV will be close to 124. Is this not guaranteed?

[Akash_Shah]

@Prabhakar_MC

I understand there will be NAV fluctuations in the short term, but after 10 years, isn’t it guaranteed to generate 7% CAGR? At this rate after 10 years, the NAV will be close to 124. Is this not guaranteed?

No it is not guaranteed.
You holding it for 10 years is of no real significance, because fund manager can keep on buying and selling its holding intermittently, and if fund amanager’s call goes wrong, returns can change .

While there is very high chance that 10+ years of holding will give you return close to 7, it is not guaranteed.