Top Gilt Mutual Funds to Consider for Investment in March 2025
Gilt mutual funds are gaining attention among aggressive and sophisticated debt investors as they are expected to deliver strong returns if the Reserve Bank of India (RBI) initiates interest rate cuts. Financial experts believe that gilt funds have the potential to offer double-digit returns in a declining interest rate scenario.
Investment Opportunity and Risks of Gilt Funds
For those who want to gain from a potential decline in interest rates, gilt mutual funds offer a great opportunity. Nevertheless, these funds are highly sensitive to interest rate movements and, thus are a risk for normal debt investors. The performance of gilt funds is very much related to bond price movements and yields, which are inversely related. When the interest rates go up, the prices of bonds go down, and the net asset values (NAVs) of such schemes fall.
Owing to their volatility, gilt funds are usually advised to knowledgeable investors who have a long-term perspective and are willing to take risks. Such schemes perform worst when there is a rising interest rate scenario, so these are not advisable for conservative debt investors.
Understanding Gilt Mutual Funds
Gilt funds are a segment of debt mutual funds that essentially invest in government securities (G-Secs). As per SEBI rules, such schemes are required to have a minimum of 80% of their assets in government bonds. As they lend to the government alone, they are free from credit risk or default risk. However, they are extremely exposed to interest rate fluctuations.
Investing in gilt funds involves an in-depth understanding of interest rate movements in the economy.
Interest rate cycles are long-term and last for years, and any expected rate hike can hurt gilt fund performance. Short-term investors might incur losses in a rising rate scenario, but long-term investors who have the patience to wait for the interest rate cycle to turn around can expect to gain high returns. These funds have traditionally produced double-digit returns when interest rates start falling or when market players expect that shift.
Top Gilt Mutual Funds for Investment in March 2025
Some of the gilt funds have exhibited sustained performance, which could make them interesting options for investors wishing to ride the change in interest rates.
These are the schemes identified as high-performing funds according to historical returns and risk-adjusted performance criteria:
- Nippon India Gilt Securities Fund
- Bandhan G-Sec Fund
- SBI Magnum Gilt Fund
- ICICI Prudential Gilt Fund
- Aditya Birla Sun Life Government Securities Fund
The performance tracking has shown that the Nippon India Gilt Securities Fund has been placed in the third quartile over the last seven months, moving from its previous ranking in the fourth quartile.
Likewise, the Aditya Birla Sun Life Government Securities Fund has also stayed in the third quartile over the last 11 months.
The Bandhan Government Securities Fund, earlier in the second quarter, shifted to the third quarter in the last month. Investors should check these schemes frequently to track their performance.
Methodology for Shortlisting the Top Gilt Funds
The ranking of the top gilt mutual funds is done using a systematic methodology, including the following major parameters:
1. Mean Rolling Returns: Rolling returns on a daily basis for the last three years were compared to determine consistency in performance.
2. Consistency of Returns: The Hurst Exponent (H) was employed to gauge the stability and predictability of NAV movements.
- When H = 0.5, the returns are random in nature and thus difficult to predict.
- When H < 0.5, the returns have a mean-reverting tendency.
- For H > 0.5, the returns exhibit persistence, and a more dominant trend can signal stability.
3. Downside Risk: This is the measure that only takes negative returns into account in order to determine the level of risk in the mutual fund scheme. It is computed as:
- X: Negative returns were observed by the scheme.
- Y: Total sum of squares of all negative returns.
- Z: Y’s average for the period being considered.
- Downside Risk: Square root of Z.
4. Analysis of Outperformance: The active return of the fund is calculated by subtracting the return on the benchmark from the rolling return of the fund.
5. Asset Size Basis: Debt funds with assets under management (AUM) of Rs.50 crore and above were alone considered to facilitate liquidity and stability.
Conclusion
The performance of gilt mutual funds during March 2025 depicts the effect of changing interest rate expectations. While the funds are capable of offering great returns in declining rate phases, they involve some inherent risks too.
Potential buyers of gilt funds must possess an adequate idea of interest rate cycles and a strong stomach to digest short-run fluctuations.
Individuals with a long investment horizon and higher risk tolerance may consider these schemes as a worthwhile addition to their portfolio. As with any investment, though, frequent review and diversification strategy continue to be the key to maximizing returns while controlling risks.
