Gilt Funds with a 10-year Constant Duration – Definition, Features and Should You Invest in Them


  • Gilt funds perform well in a falling interest rate scenario
  • As interest rates have fallen significantly and may not fall as much as the last 2 years - will it be good investing in gilt funds? Read this and decide

Debt funds invest in various debt securities such as corporate bonds, money market instruments, commercial paper, certificate of deposit, treasury bills and government securities. Different types of debt funds invest for varying maturities or duration of these securities. So, there could be a debt fund investing in securities maturing in a day, month, year, three years and more.

Categories of debt funds are classified based on their maturity profile and the type of securities they buy in the portfolio. Gilt funds with 10-year constant duration are a type of debt fund, let us understand more about these funds.

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What are Gilt Funds with a 10 Year Constant Duration?

These funds are open-ended debt funds that invest in government securities having a constant or fixed duration of 10 years. For simplicity, you can assume duration to be the period in which the debt security will fully mature and return all coupons or interest payments.

The objective of these funds is to deliver good returns by investing in the government of India securities which are of the highest quality. These securities are rated SO (sovereign), which is the highest rating for any debt security.

These funds do exceedingly well in a falling interest rate scenario and outperform other debt funds such as medium term, short term, low duration funds and long duration funds. You can expect double-digit returns in a falling interest rate scenario. However, if interest rates move up sharply these funds will underperform, and you can expect single-digit returns.

There is another category of debt fund called gilt funds in which the portfolio comprises government securities of varying duration. The government raises money from debt markets by issuing these securities for various durations such as for 5 years, 6 years, 8 years and 10 years. So, a gilt fund can have 10 securities of different durations basis the fund manager’s view on interest rates and government’s finances for different periods.

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Like all other funds, these funds have their own features, let us understand them.

Factors to Consider When Investing in These Funds

Returns – These funds perform exceptionally well in a falling interest rate scenario, returns can be as high as 10-14%, even beating returns from equity funds at times. However, one needs to be careful when investing in these funds since in a rising interest rate scenario these funds will not do well, and returns could reverse.

Volatility – These funds are more volatile than gilt funds. A sharp movement in interest rates will lead to a sudden change in NAVs.

Risk – These funds carry an interest rate risk but no credit risk. A sudden or expected rise in interest rates can lead to negative returns also on some days. These funds are riskier than other open-ended debt funds such as gilt funds, short, medium and long duration funds.

Time Horizon – When investing in these funds, you should invest with a long term time horizon, ideally 10 years, since these funds carry constant duration and should deliver expected returns in this period. You can also take a shorter view of 3 to 4 years if you expect interest rates to fall.

Taxation – A time horizon of three years also makes these funds more tax efficient since you can avail indexation benefit. Post-indexation, tax liability works out to NIL or very low.

Should You Invest in Gilt Funds with a 10-year Constant Duration?

These funds are suitable for people who are looking to invest with a time horizon of at least 3-4 years and ideally 8-10 years. These funds are good if you are aiming for higher returns with a higher risk than all other debt funds. If you want your debt investment to be completely risk-free, you are better off investing in overnight or liquid funds only.

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These funds are the riskiest amongst all debt funds, so you need to be mindful of this fact. These funds qualify for debt fund taxation. Please note that if you withdraw before a year from a debt fund, STCG (short term capital gain tax) is applicable which is basis a person’s tax slab.

So, you should calculate the post-tax return before investing. If you invest in this fund that gives you a 10% return and if you are in the 20% tax bracket, the net returns post-tax will be 8.00%.

We do not recommend investing in these funds in the current scenario since interest rates have already fallen significantly and might not fall as much as the past two years. In the next 2 to 3 years, these funds might not be able to sustain their past performance.

If you wish to invest in a fund having only government securities, it is better to invest in gilt funds. To know about the best gilt funds you can read another post of ours-

If your time horizon is between a year to 18 months, it is ideal to invest in short term debt funds. To know more about short term debt funds and the best short term debt funds to invest, you can read another post of ours-

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