Gilt Funds with 10 Year Constant Duration as Debt Funds investing a minimum of 80 percent of their assets in government securities issued by the Reserve Bank of India (RBI) with Macaulay Duration of the portfolio equal to 10 years.
Macaulay duration is referred to as the average remaining duration of maturity.
Gilt funds with constant duration tend to offer dual benefits of security and returns. Since these investments are exposed to government bonds and securities, there is very little credit risk involved. These funds are considered more prone to interest rate risk and can be chosen as an alternative to investments in bank savings accounts.
Top performing Gilt Funds with 10 year Constant Duration
| Fund | AUM
(In Cr) |
Expense Ratio
(In %) |
1-Year Returns
(In %) |
| SBI Magnum Constant Maturity Fund | 551 | 0.33 | 13.82 |
| IDFC Govt. Securities Constant Maturity Fund | 159 | 0.40 | 15.13 |
| ICICI Prudential Constant Maturity Gilt Fund | 99 | 0.17 | 14.94 |
| DSP 10Y G-Sec | 44 | 0.30 | 13.23 |
Data as on 27 March 2020; Source: Value Research
*The above funds have been arranged on the basis of their AUM and only Direct Plans have been included in the table given above
Features
- A Constant Gilt Fund invests in State and Central government bonds with a maturity period of around 10 years
- These funds predominantly generate returns by trading underlying instruments
- While dealing with these funds, fund managers tend to trade in and out of gilts with varying maturities. This helps the fund managers to a look at the future movement of interest rates in the market and invest in short term or long term gilts accordingly
- Fund managers of these funds are known to follow a passive approach towards these bonds as they do not actively manage the lending duration irrespective of rate changes and the portfolio duration is maintained constantly at 10 years
- These funds work like Index Funds for 10 years for G-sec (government securities). However, Government securities are not purchased or sold because of moving interest rates in the economy
- Since these funds invest in government securities, which is rarely a defaulter, there is hardly any chance that the principal amount and interest is not returned to the borrower. Owing to this, the investors of these funds get SOV/Sovereign Rating, implying that their securities are backed by the government by credit rating agencies
Advantages of Investing in GILT Funds with 10 Year Constant Duration
- Constant Gilt Funds investments offer lower risk of returns being hit even when the interest rates fluctuate
- Unlike Debt funds, Gilt Funds with constant duration are not exposed to credit risk unless the government goes bankrupt
- Gilt funds with constant duration allow the investors to make a shift in the invested horizon of investors from short term gilt securities to long term securities (with a higher maturity) when the interest rate falls
Who Should Invest
- Investors who are looking for long-term investment options, at least 10 years, to be specific
- Investor who have a very low risk appetite people as government securities are considered to be safest instrument
- Those who wish to earn higher returns than Fixed Deposits at a similar level of safety of investment may consider investing in these funds
Things to be Considered before Investing
- Since these funds have a long maturity period, they are quite sensitive to the changes in interest rates
- For instance, if you have invested in these funds and the interest rate begins to rise, then there would be very high chances that the funds would begin to deliver negative returns. On the contrary, if the interest rate begins to fall, after you have invested in these funds, there are high chances that the fund would deliver high returns
- It is advised that investors should first wait for the interest rates to go down and then invest because in such a case, decreased interest rates would cause a rise in the prices of long term gilt securities
- Since gilts are linked to the market on an everyday basis, the price movement is clearly reflected on the fund’s NAV. Hence, it advised that investors keep a check on the fund’s NAV before investing in these funds
- Investors of Gilt funds are bound to pay an Expense Ratio equal to the percentage of fund’s average assets under management
Taxation
Since Constant Gilt Funds are treated as Debt Funds, their taxation benefits are also similar to the ones offered with debt funds.
For example- If an investor has made a capital gain of ₹50,000 on investment in a debt mutual fund and withdraws the amount before 3 years of investment, Short Term Capital Gains Tax would be levied, as per the income tax slab of the investor. ₹50,000 would be added to the taxable income of the investor and taxed accordingly.
If an investor withdraws the investment including capital gains post 3 years of investment, 20% Long Term Capital Gains Tax is levied, with the benefit of indexation.
Indexation reduces the value of overall Long Term Capital gains to reflect the effect of inflation on your investment.
To calculate the final value of capital gains post indexation, we use government’s Cost Inflation Index (CII) in the following formula:
Indexed cost of Acquisition = Investment Amount * (CII of the year of withdrawal/ CII of the year of investment)
Suppose the investment amount is ₹70,000 in the year 2016 and the withdrawal amount is ₹1 Lakh. The value of capital gains is ₹30,000 before indexation
Indexed Cost of Acquisition= 70000* (280/254) = 77165.35
Note: CII in the year 2015 = 254
CII in the year 2018 = 280
Final Value of Capital Gains= 100000- 77165.35 = 22834.65
Tax Payable = 20% of 22834.65 = 4566.93
How to Invest in GILT Funds with 10 Year Constant Duration
You can invest in Gilt funds with constant duration through either of the following ways-
- Offline mode of investing– If you are not confident of your knowledge, you may choose to invest through a broker. However, investing in a fund through a broker will make you eligible for investments through regular plans that offer different returns and varied expenses in investment. If you wish to invest in the fund independently, you must visit the nearest branch of the AMC of your fund. Don’t forget to carry the following documents-
- Identity Proof (Aadhar Card)
- Canceled cheque
- Passport size photos (around 4-5)
- PAN Card
- KYC documents (for KYC verification)
- Online mode of investing– If you do not wish to add on to your expense of commissions or brokerage, you may visit online investment platforms such as Paisabazaar.com wherein you can choose from and compare more than 1,700 funds- all in one place, instead of following the long procedure of visiting the website of each AMC and then choosing from them. Here, you can select the fund in which you want to invest, look at the details and compare similar schemes as well as use SIP Calculator or Lumpsum Calculator to estimate the future value of your investment
How are Gilt Funds Different from Gilt Funds With 10 Year Constant Duration
Gilt Funds are funds with investments in a mix of government bonds and debentures with varying maturities, in which the Fund Manager allocates a major part of the fund’s corpus towards longer or shorter maturities tenures based on the prevailing interest rate scenario.
Whereas, in Constant Gilt Fund, the maturity duration is fixed for 10 years and there is no active shifting of maturity duration of the portfolio. Traditional Gilt Fund Managers try to make most of the interest rate movement. When rates are expected to go down, he may shift the portfolio fund majorly in bonds with 15-20 year or higher maturities. A higher portion of the fund money may be invested in bonds with 7-10 year or lower maturity when rates go higher.