Gilt Funds with 10 Year Constant Duration

Gilt funds are mutual funds that invest only in government securities, also known as G-Secs. These instruments carry minimal credit risk, as the central government issues these securities. However, gilt funds are not risk-free. Their returns depend heavily on interest rates:
Interest rates are inversely proportional to bond prices

• They perform well when interest rates fall, because bond prices go up.
• They make losses when interest rates rise, as bond prices fall in such cases.

So, while there is no credit risk, there is interest rate risk in gilt funds.

What Is a Gilt Fund with 10-Year Constant Duration?

A gilt fund with a 10-year constant duration is a special type of gilt fund. It is called a “constant duration” fund because the fund manager always adjusts the portfolio so that the average maturity remains close to 10 years, regardless of the actual maturity of individual securities.

This means the portfolio is actively rebalanced to maintain a fixed 10-year exposure to interest rate movements.

The significant risk in such funds is interest rate risk, as longer duration portfolios react more sharply to changes in interest rates. These funds are best suited for scenarios where interest rates are expected to fall over time.

Who Should Invest in Gilt Funds with 10-Year Constant Duration?

• If you want to invest long-term, usually for 5 years or more.
• If you prefer low-risk options without worrying about credit defaults.
• If you expect interest rates to come down in the future.
• If you are in a high tax bracket and want more tax-efficient returns than FDS.
• If you want to diversify your debt investments with government-backed securities.

Advantages of 10-Year Constant Gilt Funds

Risks Associated with Gilt Funds

Even though the fund is safe from credit defaults, it is susceptible to changes in interest rates.

Taxation of Debt Funds (Including Gilt Funds)

As per current tax rules:

• Short-Term Capital Gains (STCG): If units are sold before 3 years, the gains are taxed at your income tax slab rate.
• Long-Term Capital Gains (LTCG): If held for more than 3 years, gains are taxed at a flat rate of 20% without indexation (per new rules post-April 2023).

This makes gilt funds less tax-efficient in the short term, but reasonably efficient in the long term for high-income investors.

Things to Consider Before Investing

Before investing in a 10-year constant duration gilt fund, you must question yourself. 

• Do I expect interest rates to decline in the coming years?
• Can I stay invested for at least 5 years or longer?
• Am I looking for a risk-free principal with some return potential?
• Do I understand that returns may vary with interest rate changes?
  If you feel you are clear to yourselves, you may proceed 

Example

Varsha is a 30-year-old developer in the IT sector. She has been investing in fixed deposits for years, but recently, she found that FD interest rates have dropped, and her returns are not beating inflation.

She does not want to take risks with equity markets but still wants to earn better returns over the next 7–10 years. Her financial advisor suggested gilt funds with a 10-year constant duration.

Varsha felt 

• She is in the highest tax bracket, so she prefers tax-efficient investments.
• She does not need this money for the next 10 years.
• She wants to keep her capital safe, but with better returns than bank FDS.
• She believes interest rates will come down in the future, which will benefit long-duration 

She felt this to be a suitable and smarter choice for her

Conclusion

Gilt funds with a 10-year constant duration are a low-risk, interest rate-sensitive option best suited for long-term conservative investors. If you plan to invest during a falling interest rate cycle and want to avoid credit risk, these funds can serve as a strong alternative to traditional fixed-income products.