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Gilt mutual funds with 10-year constant duration

  • Akshatha Sajumon
  • 12 Jan
  • 7 minutes

Central and state governments often require funds to meet financial needs of short-term and long-term projects. For such capital needs, the government often reaches out to the central bank of the country. The central bank or RBI will then borrow funds to provide to the government, thereby acting as the government’s banker.

The RBI issues government securities with a fixed interest rate against the borrowed funds. These securities are known as Gilts. A Gilt fund, therefore, is a fund that primarily invests in Gilts, making at least 80% of the portfolio to constitute Gilts. 

Based on a structure similar to gilt funds, are 10-year constant duration Gilt funds. Here, we will discuss in detail about this variant of Gilt funds and also share top fund recommendations within this fund category.

What are Gilt Funds with 10-year constant duration?

A Gilt fund invests in Gilts, whereas a 10-year constant duration Gilt fund invests in Gilts and government securities that have constant maturity of 10 years. The word ‘constant’ in the fund name means that the fund is always invested in gilts with 10-year duration. At the end of the maturity period, investors get their initial investment back, which is, at the end of 10 years.

Difference between gilt funds and gilt funds with 10 year constant duration

Gilt Funds invest in a combination of government bonds and debentures that have different maturities. Here, the fund manager invests a major portion of the fund’s corpus in instruments with long or short maturities, depending on the ongoing interest rates.

When it comes to 10 year constant gilt funds, the maturity is fixed at 10 years and the funds do not involve active shuffling of maturity duration within the portfolio. While gilt fund managers try to fetch benefits from interest rate movements, this is not the case with 10 year constant gilt funds. 

Therefore, these funds may be more affected by fluctuating interest rates. 

Just like gilt funds, 10-year constant duration gilt funds also invest in fixed interest government bonds and securities. In case of a fall in interest rates, 10-year constant duration gilt funds could benefit since the fixed interest rate could be higher than what is available on other debt or equity instruments. On the other hand, these may lose value if interest rates increase, since the fixed interest rate may be lower than the rate offered on other debt or equity instruments. 

Why do Gilt mutual funds with 10 year constant duration make for a good investment choice?

Gilt mutual funds are safe investments that are government-backed and the investment instruments are issued by the RBI. Here are a few points to highlight the benefits of these funds:

  • Considering lower chances of the government going bankrupt, constant duration gilt funds do not carry much of a credit risk
  • This makes for a safe long-term investment option with guaranteed returns.

Are gilt mutual funds with a 10 year constant duration worth investing?

Here are some of the factors that investors can consider before allocating their money to 10 year constant duration gilt funds:

  • These funds are highly sensitive to interest rate movements due to the duration of investment. It is best to invest in these funds when the interest rates are falling or expected to fall further. This is because a fall in interest rates results in higher prices of gilt securities.
  • Investors must also keep a constant eye on the fund’s NAV since these keep moving as per market movements.
  • The expense ratio of these funds is generally based on the fund’s AUM or average assets under management.

What is the tax implication of 10 year constant duration gilt funds?

When it comes to taxation, returns from 10-year constant gilt funds are treated similar to debt fund returns. For example, if an investor makes a capital gain of Rs. 10,000 from a debt mutual fund investment and withdraws the amount before completion of 3 years from investment, Short Term Capital Gains Tax is applicable as per the investor’s income tax slab rate. To calculate total tax, the earnings from this investment are added to the total taxable income of the investor.

If the investor withdraws the gains after 3 years of investment, long-term capital gains tax is applicable at 20% with the benefit of indexation. Indexation helps in reducing the total value of Long Term Capital gains by taking into account the inflation factor on an investment.

Top rated gilt mutual funds

Listed here are some of the top rated gilt mutual funds and key statistics for investor reference.

a. ICICI Prudential Constant Maturity Gilt fund

About the Fund

The scheme’s objective is to generate earnings through investment in a portfolio of Government Securities. It aims to maintain the portfolio’s Macaulay duration at around 10 years.

Inception Date September 12, 2014
Benchmark Name CRISIL 10-Year Gilt
Fund Manager Rahul GoswamiAnuj Tagra
Expense Ratio 0.23%

Historical Returns of the Fund (annualised)

1-Year 2-Year 3-Year 5-Year Since Inception
5.52% 8.91% 12.16% 9.27% 10.38%

b. SBI Magnum Constant Maturity Fund

About the Fund

The fund aims to generate returns from investments mainly in Government securities (Central and/or State) such that the average maturity of the portfolio is approximately 10 years.

Inception Date January 01, 2013
Benchmark Name CRISIL 10-Year Gilt
Fund Manager Dinesh Ahuja
Expense Ratio 0.32%

Historical Returns of the Fund (annualised)

1-Year 2-Year 3-Year 5-Year Since Inception
4.65% 7.58% 10.89% 9.57% 10.03%

c. IDFC Government Securities Fund – Constant Maturity Plan

About the Fund

The scheme aims to generate maximum returns through investment in high quality Government Securities while maintaining the weighted average portfolio maturity of around 10 years.

Inception Date January 01, 2013
Benchmark Name CRISIL 10-Year Gilt
Fund Manager Harshal Joshi
Expense Ratio 0.48%

Historical Returns of the Fund (annualised)

1-Year 2-Year 3-Year 5-Year Since Inception
5.13% 8.43% 12.68% 10.14% 10.36%

Conclusion

While investing in gilt mutual funds with 10-year constant duration, an investor has to be sure about the investment decision. This requires clarity about the risk-return element of the funds and the overall portfolio. When included within an investment portfolio, these investment options can ensure overall balance by limiting the risk and increasing chances of positive returns.

FAQs

  1. How to invest in gilt funds?
    To invest in gilt funds, you can download the Fisdom app on your smartphone and gain access to a number of fund options before you shortlist and invest. 
  1. What is the duration of gilt funds?
    Gilt fund investments generally require an investment horizon of 3-5 years since these could have medium to long-term maturity. Gilt funds with 10 year constant duration are for a very long term, i.e. 10 years.
  1. Can you lose money in gilt funds?
    Gilt funds carry zero credit risk, as there is almost no risk of default. However, these do have duration risk depending on the timeline for which one invests in these and the interest rate movements therein.
  1. Who should invest in gilt funds with a 10 year constant duration?
    Gilt funds ensure capital protection and carry limited to no risk. Since 10 year constant duration gilt funds require long-term commitment, these are ideal for investors who want to park their funds by taking on minimal or no risk.
  1. Are debt funds better than gilt funds?
    Debt funds invest in various debt instruments and may carry some amount of credit risk. However, there is no credit risk in case of gilt funds. Debt funds are ideal for investors who are comfortable with short-term investments, while gilt funds can suit investors who have at least a 3-5 year investment horizon.
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Akshatha Sajumon

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