Read this blog to know everything about 10-year constant-duration Gilt funds. Find out how a 10-year constant duration Gilt fund works, why they exist and if you should invest in them.
November 8, 2024
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When the Central or State government needs a loan for a short or long term project, it will approach the Reserve Bank of India to fulfil its capital requirements.
The RBI generally borrows money from various banks, insurance institutions, NBFCs, etc. to ensure that the government can finance the project.
In exchange for the money borrowed, the RBI issues fixed interest government securities commonly known as Gilts. A Gilt fund invests in these Gilts, which make up at least 80% of its portfolio.
There is another type of Gilt fund known as a 10-year Gilt fund or a Gilt fund with a 10-year constant duration. The name of the Gilt fund might seem stretched out, but it actually says all you need to know about the fund.
Important: This blog is meant to educate readers and the information furnished here is not to be construed as investment advice from Cube Wealth.
What Are Gilt Funds with 10-Year Constant Duration?
A Gilt fund invests in Gilts, a type of fixed interest government security issued by the RBI. A 10-year constant duration Gilt fund invests in Gilts and government securities with a constant maturity of 10 years.
When it comes to debt funds, portfolio maturity generally means the time it takes to get the complete debt or loan back from the borrower, which, in this case, would be 10 years.
Here’s a list of the average portfolio maturity of various debt funds for context:
Overnight funds: 1 day (overnight)
Liquid funds: 91 days
10-year constant duration Gilt Funds: 10 years
“Constant” indicates that this type of Gilt fund will have 10-year duration gilts in its portfolio at any given point of time. Logically, the longer a loan goes on, the higher the risks it carries.
Moreover, 10-year constant duration Gilt funds are also affected by fluctuating interest rates. Let’s see how.
Relation With Interest Rates
10-year constant duration Gilt funds are affected by two factors:
Rising interest rates
Falling interest rates
It’s important to note that a Gilt fund invests in “fixed interest” government bonds and securities, so do 10-year constant duration Gilt funds.
If the interest rates fall based on RBI’s repo rate adjustments, 10-year constant duration Gilt funds may gain value because the fixed interest rate is known to be a lucrative proposition than other debt and equity instruments.
On the other hand, 10-year constant duration Gilt funds may lose value if interest rates rise due to the fixed interest being prospectively lower than other debt or equity instruments.
In comparison, overnight funds and liquid funds are not as adversely impacted by interest rates due to the short maturity period. You can read more about overnight funds and liquid funds here:
Repo rate: The rate of interest when RBI lends capital to commercial banks; Currently 4.00%**
Reverse repo rate: The rate of interest when RBI borrows capital from commercial banks; Currently 3.35%**
3 Advantages Of A 10-Year Constant Duration Gilt Fund
1. Comparatively Safe
10-year constant duration Gilt funds are considered to be safer than equity funds and hybrid funds because the securities they invest in are issued by the government of India and RBI.
In general, the government is known to pay back the money it borrows for its projects. Thus, 10-year constant duration Gilt funds have a relatively low default risk but do carry interest rate risk.
As the name suggests, 10-year constant duration Gilt funds have a maturity period of 10 years. Thus, investors with a patient, long term view of investing may find it to be a suitable investment option.
2 Limitations Of A 10-Year Constant Duration Gilt Fund
1. Low returns
As with any debt fund, 10-year constant duration Gilt funds are known to generate comparatively lower returns than equity funds. Historical data indicates that the returns can range from 9-10% for 5+ years.
While 10-year constant duration Gilt funds may have a near-zero or negligible default risk, they do carry interest rate risks. The rising and falling interest rates may impact the NAV of the fund.
10-year constant duration Gilt funds are taxed just like Debt funds:
1. If the investment is held for less than 3 years, Short Term Capital Gains are taxed according to the investor’s tax bracket
2. If the investment is held for more than 3 years, Long Term Capital Gains are taxed at 20% with indexation benefits
The STCG implies that investors at a higher tax bracket will end up paying higher taxes even if they earn the same returns as someone from a lower tax bracket.
ELSS funds and other equity funds are more tax-efficient than 10-year constant duration Gilt funds. Download the Cube Wealth app to know more about ELSS and equity funds.
Should You Invest In Gilt Funds?
A lot can happen in 10 years in the world of finance. This is especially true for 10-year constant duration Gilt funds because of the long duration securities they invest in.
Investors must also be wary of the interest rate risks and low returns that are a part of the makeup of 10-year constant duration Gilt funds. There are better investment options with similar benefits like liquid funds, overnight funds, ultra short term funds, and other debt funds.
You can invest in these mutual funds on the Cube Wealth app with advice from Cube’s Mutual Fund Advisory partner Wealth First. Wealth First has a track record of beating the market by ~50% and helps you get curated recommendations on the Cube Wealth app every month.
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