Gilt funds with 10-year constant duration are debt funds that invest in government securities with a ten-year constant maturity. It invests in central and state government securities with a 10-year Macaulay duration. It may provide a better return than medium-duration funds.
— Registered with SEBI, AMFI & BSE
— Paperless sign up on web & app
— Expert recommendations
— ZERO fees !
Gilt mutual funds primarily invest in securities issued by the Reserve Bank of India to fund government operations.
The primary function of the central bank is to act as a banker to the government. Both central and state units can approach the RBI if they require additional funds to meet operational expenses. The central bank, in turn, issues interest-bearing bonds, which it sells to the residents in exchange for funds. These bonds come with a fixed maturity period, after which investors are disbursed the corpus amount along with proposed interest rates. Mutual funds comprising such government-mandated security are known as gilt funds.
A gilt fund with a 10-year constant duration entails a fixed maturity period of 10 years and is suitable for long-term investment schemes for individuals with a lower aptitude for market risks.
The primary characteristics of a Gilt Fund with a 10-year constant duration:
The RBI adjusts the repo rates in the market from time to time, which, in turn, affects the interests at which zero-risk instruments are extended. Investing in a gilt fund with a ten-year constant duration during times of falling interest rates is profitable, as the returns generated through such investments are higher than the profitability of a risk-free instrument.
On the other hand, an increase in the repo rate can raise market interest rates as well. In such situations, instruments with negligible risk associated tend to be more profitable investment ventures, as they offer high returns compared to a 10-year gilt fund.
A falling market interest rate due to repo rate cuts drives the returns released from gilt funds subsequently, making it a profitable investment venture. On the other hand, if the market interest rates rise, then returns from gilt funds are relatively lower.
You can invest in the Gilt Fund for ten-year constant duration directly through AMC or even via reliable platforms such as Groww's application. All that you would have to do is register, complete KYC, choose and invest in a fund, and get started.
A gilt fund is considered one of the safest investment options in the market, as it is issued by the union government and the RBI. The corpus amount has negligible risk involved, as the government is liable to pay the money back to the investors. Nonetheless, returns generated on the same can fluctuate depending upon the pattern of interest rate fluctuations in the country.
The benefits of a gilt fund can be listed as follows -
Secure Investment
Gilt funds act as one of the most reliable forms of mutual funds available in the market, as at least 80% of the total portfolio is invested in government-issued assets. The government has an obligation to repay both the principal and interest component of the investment to the public, hence ensuring zero risk to the portfolio.
It is even safer than standard debt funds, as they have associated risks regarding the stability of an issuing company.
Risk
Even though the corpus amount has zero associated risks as the central government is obligated to pay back the obtained security, returns generated by the same are dependent upon fluctuations in interest rates.
Nonetheless, interest rates are dependent on market repo rates, which are determined by the Reserve Bank, keeping in mind the speculative demand for investment as well. As a result, a specified return rate is always associated with such investments to entice investors into purchasing NAV units of gilt funds comprising such securities.
Time Period
As the name suggests, gilt with a ten-year constant duration comes with a ten-year lock-in period, designed so that the Macaulay duration of the portfolio is fixed at ten years.
Investors looking for secure forms of investment with zero risk and substantial returns can opt for 10-year gilt funds in India.
A gilt fund with a constant ten-year duration is subject to long-term capital gains tax, as the maturity period is longer than three years. After adjustment for indexation, 20% of the total capital earnings (realized amount upon maturity - invested amount) have to be paid as long-term capital gains tax.
In case an investor decides to sell the security before three years, short-term capital gains have to be paid on any capital profits. The short-term tax rate depends upon the income of respective investors.
Q1. What is the meaning of a gilt fund with a constant ten-year duration?
These are debt funds that invest in government bonds. The fund managers do not actively control the lending length; instead, they keep it constant at ten years throughout the whole portfolio.
Q2. Are gilt funds suitable for the long term?
Long-term gilt funds may be more risky because they hold bonds with maturities of up to ten years.
Q3. For how long should one invest in Gilt with 10 year Constant Duration Mutual Funds?
These funds lend to the government for a long period. Thus, you should stay invested for at least 5-6 years.
Q4. What is the primary benefit of a Gilt Fund with 10-Year Constant Duration?
It may perform well in a declining interest rate environment and provide a higher return than many debt funds.
Q5. Are ten year Constant Duration Gilt Mutual Funds risky?
In the short to medium term, these funds can be quite volatile.
Disclaimer - Mutual Fund investments are subject to market risks; read all scheme-related documents carefully.
Explore all Mutual Funds on Groww