Gilt ETFs: A Sovereign Path to Diversification
A Gilt ETF is a debt exchange traded fund that primarily invests in government bonds and trades on a stock exchange. These securities are issued by the central and state governments, offering minimal risk of default.
While these ETFs have minimal credit risk as they hold sovereign securities, they might carry interest rate risk, i.e., the ETF's price might be sensitive to changes in the economy's interest rates.
How Gilt ETFs Work
Whenever the Central or State Government requires funds for developmental projects or infrastructure, they borrow through the Reserve Bank of India (RBI). The RBI issues Government Securities (G-Secs) with fixed tenures. When you invest in Gilt ETFs, you are tracking indices whose underlying assets are these G-Secs.
Unlike regular debt funds that may invest in corporate bonds, Gilt ETFs focus exclusively on these sovereign instruments.
What are the benefits of investing in Gilt ETFs
- Minimal Credit Risk: Since the borrower is the government, there is minimal risk of default on principal or interest payments.
- Accessibility: Gilt ETFs provide a simple entry point to invest in government bonds through the stock exchange.
Understanding the Interest Rate Cycle
The performance of Gilt ETFs is closely tied to the interest rate cycle and other market factors. Bond prices and interest rates share an inverse relationship:
- Falling Rates: When interest rates decline, existing bonds with higher interest become more valuable, leading to capital appreciation and higher NAV for the ETF.
- Rising Rates: Conversely, when rates rise, bond prices typically fall, which may result in a decline in the ETF’s value.
Who Should Invest in Gilt ETFs?
Gilt ETFs may be suitable for those investors who are seeking some income over aggressive growth. They are also a valuable tool for those looking to diversify their portfolio and hedge against equity market volatility.
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Mutual Fund investments are subject to market risks, read all scheme related documents carefully
Published on Jan 15th, 2026