What Are Gilt Funds with 10 Year Constant Duration?
Gilt Funds with 10 Year Constant Duration are debt mutual funds that invest in government securities and maintain a constant duration of approximately 10 years. Unlike regular gilt funds where duration can vary, these funds actively manage the portfolio to keep the average maturity around 10 years, providing predictable interest rate sensitivity. The constant duration ensures that the fund's NAV movements are directly linked to interest rate changes in a predictable manner, making them suitable for investors who want to benefit from interest rate movements while maintaining minimal credit risk.
Key Features of Constant Duration Gilt Funds
Constant Duration
Maintain a constant average maturity of approximately 10 years, providing predictable interest rate sensitivity.
Minimal Credit Risk
Invest in government securities, which have minimal credit risk as they are backed by the government.
Predictable Sensitivity
NAV movements are directly linked to interest rate changes in a predictable manner due to constant duration.
High Interest Rate Risk
High interest rate sensitivity due to 10-year duration, making NAV volatile when interest rates change.
How Constant Duration Works
Duration Management Strategy
Constant Duration Gilt Funds actively manage the portfolio to maintain an average maturity of approximately 10 years. When bonds mature or approach maturity, the fund manager replaces them with longer-dated securities to maintain the target duration. This ensures that the fund's interest rate sensitivity remains constant, providing predictable NAV movements based on interest rate changes.
When Rates Fall
Bond prices rise, NAV increases, providing capital gains for investors.
When Rates Rise
Bond prices fall, NAV decreases, resulting in capital losses for investors.
Benefits of Constant Duration Gilt Funds
Minimal Credit Risk
Invest in government securities, which have minimal credit risk as they are backed by the government, providing capital safety.
Predictable Exposure
Constant duration provides predictable interest rate exposure, making it easier to understand and manage interest rate risk.
Benefit from Rate Cuts
When interest rates fall, bond prices rise, providing capital gains. The constant duration ensures maximum benefit from rate movements.
Tax Efficiency
Long-term capital gains (3+ years) taxed at 20% with indexation benefit, which can significantly reduce tax liability.
Risks and Considerations
High Interest Rate Risk
The 10-year constant duration means high sensitivity to interest rate changes. When rates rise, NAV can fall significantly, resulting in capital losses.
NAV Volatility
NAV can be highly volatile due to constant duration and interest rate sensitivity, making them unsuitable for short-term investments.
Rate Hike Impact
When interest rates rise, bond prices fall, and NAV decreases. Investors may face capital losses if they need to redeem during rate hikes.
Returns Not Guaranteed
Returns are market-linked and depend on interest rates and bond prices, which can fluctuate based on monetary policy and economic conditions.
Who Should Invest in Constant Duration Gilt Funds?
Predictable Exposure Seekers
Ideal for investors seeking predictable interest rate exposure with minimal credit risk, who understand the impact of rate movements.
High Risk Tolerance
Suitable for investors with high risk tolerance for interest rate movements, who can accept NAV volatility for potential gains.
Medium to Long-term
Best for investors with medium to long-term investment horizons (3-5 years) to benefit from interest rate cycles and tax efficiency.
Rate Cut Beneficiaries
Perfect for investors looking to benefit from falling interest rates, as bond prices rise when rates fall, providing capital gains.
Final Thoughts
Gilt Funds with 10 Year Constant Duration offer predictable interest rate exposure with minimal credit risk. They maintain a constant average maturity of approximately 10 years by actively managing the portfolio, ensuring that NAV movements are directly linked to interest rate changes in a predictable manner. This makes them suitable for investors who want to benefit from interest rate movements while maintaining minimal credit risk. The constant duration provides transparency and predictability, unlike regular gilt funds where duration can vary. However, the 10-year duration means high interest rate sensitivity, making NAV volatile when interest rates change. For investors seeking minimal interest rate risk, shorter duration funds or liquid funds may be more suitable, while for those looking to benefit from falling interest rates, constant duration gilt funds offer a strategic option.