Constant Maturity Gilt Funds (10-Year) – When Do They Shine?

What Are Constant Maturity Gilt Funds?

Constant maturity gilt funds are debt mutual funds that invest primarily in Government of India securities while maintaining a constant Macaulay duration of 10 years. Fund managers regularly buy and sell government securities to maintain this maturity profile.

Since these funds invest in sovereign securities, they do not carry corporate credit risk. However, their Net Asset Value (NAV) changes with movements in interest rates and bond prices.

How Do They Work?

A gilt fund with a 10-year constant duration invests mainly in government bonds with a target duration of around 10 years. To maintain this duration, the fund manager may sell existing securities before maturity and replace them with other government securities as required.

When interest rates decline, bond prices generally rise, which may increase the fund's NAV. Conversely, rising interest rates may reduce bond prices and affect the NAV.

Why Do Investors Choose Them?

Some investors consider constant maturity gilt funds for the following reasons:

• Exposure to Government of India securities.
• No credit risk from private companies.
• Opportunity to participate in interest rate movements.
• Professional management of the bond portfolio.
• Diversification within a debt investment portfolio.

When Do Constant Maturity Gilt Funds Shine?

The following table shows how these funds may behave under different market conditions.

Features of Constant Maturity Gilt Funds

The following are some common features of constant maturity gilt funds:

• Invest mainly in Government of India securities.
• Maintain an average maturity of around 10 years.
• No corporate credit risk.
• Managed by professional fund managers.
• Performance depends largely on interest rate movements.
• Available through lump sum investments and Systematic Investment Plans (SIPs).

Understanding the Risks

Although these funds invest in government securities, they are not free from investment risk. Their prices are highly sensitive to changes in interest rates because of their longer maturity profile.

If interest rates increase, the Net Asset Value (NAV) may decline even though the underlying securities are backed by the Government of India. Investors should also understand that returns are market-linked and may vary across investment periods.

Suitable Investor Profile

Constant maturity gilt funds may be considered by investors who understand interest rate risk and have a medium- to long-term investment horizon. They may also be evaluated by investors seeking exposure to government securities through mutual funds instead of buying individual bonds.

Investors with short-term financial goals or low tolerance for price fluctuations may review other debt fund categories based on their investment objectives.

Taxation Rules

The taxation of constant maturity gilt funds follows the tax rules applicable to debt mutual funds. For units purchased on or after 1 April 2023, capital gains are added to the investor's total taxable income and taxed according to the applicable income tax slab rate, regardless of the holding period. No separate Long-Term Capital Gains (LTCG) tax treatment or indexation benefit is available for these investments under the current rules.

Since tax laws may change over time, investors may review the latest tax provisions or consult a tax adviser before making investment or redemption decisions.

How to Approach Investment Timing

Investment timing may influence the experience of holding a constant maturity gilt fund because these funds react to changes in interest rates.

Instead of investing solely based on short-term market expectations, investors may consider their investment horizon, portfolio allocation, and overall financial goals. Regular portfolio reviews may also help align investments with changing market conditions.
 

Advantages of Constant Maturity Gilt Funds

The following are some advantages of these funds:

• Invest primarily in sovereign securities.
• No corporate credit risk.
• Professionally managed portfolio.
• Opportunity to benefit from declining interest rates.
• Suitable for diversifying debt investments.
• Easy access through mutual fund platforms.

Key Points to Remember

The following points summarise the important aspects of these funds:

• Average maturity is maintained at around 10 years.
• Returns are influenced by interest rate movements.
• NAV may fluctuate in the short term.
• Government securities reduce credit risk but not market risk.
• Investment horizon plays an important role.
• Taxation follows the current debt mutual fund rules.

Constant Maturity Gilt Funds vs Regular Gilt Funds vs Target Maturity Funds

The following table highlights the key differences between these three debt fund categories.