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The largest borrower of the Indian debt market is the Government of India. Whenever the Government needs funds to undertake a project and need funds, they approach the apex Bank- The Reserve Bank of India. The RBI lends them money and as collateral, the Government of India issues securities. This government security with a fixed tenure is defined as a Gilt Fund.
When compared to most securities in the market Gilt Funds have relatively low risk and have a high rate of returns. However, like most Debt Mutual Funds, Gilt Funds get affected by the movement of interest rates.
The Macaulay Duration of Gilt Funds generally depends on the investor. He can invest in Gilt Funds depending on his financial goal.
Gilt Fund with 10-Year Constant Duration comes with a fixed tenure and if you are looking for better returns this can be an investment option that you can explore.
What is Gilt Fund with 10-Year Constant Duration
As open-ended debt security, Gilt Fund with 10-Year Constant Duration invests in government bonds. These bonds are issued by the RBI to investment houses when they disburse funds to the government-state or central.
Gilt funds, according to SEBI norms, must have at least 80% of the total assets invested in government securities. They generally have a fixed Macaulay duration of 10-Years.
Gilt Funds with a 10-Year Constant Duration work in favor of the investor in a falling interest rate regime. As compared to some of the Debt Funds, they tend to provide higher interest income to the investors.
Benefits of Investing in a 10-Year Gilt Fund
Considered as one of the safest options of investment, Gilt Funds are issued by Mutual Funds when the funds are invested in Government bonds and securities. The credit risk involved is lesser as compared to other debt funds. Upon maturity, the government is liable to pay back its investors. However, the risk factor with a 10-Year gilt fund is the changes in the interest rates over its tenure.
- Safe Investment: With 80% of the total portfolio invested in Gilt Funds with 10-Year Constant Duration, these Mutual Funds are a secure investment. The obligation of repayment of the principal amount as well as the interest payout lies on the government. This factor ensures that Gilt Funds With 10-Year Constant Duration have minimal to zero risk attached to them.
- Risk Factor: The central government is obligated to pay its investors back for the principal amount. This means that the risk factor on this invested amount is negligible. However, this is not the case when it comes to the interest payout. The returns depend on the existing or prevailing interest rate percentage. The fluctuations of interest rate over the tenure till maturity will affect the returns you receive.
- Tenure: For investors looking for long-term investments with high returns and low risk. Gilt Funds with 10-Year a Constant Duration is a good option.
Who should Invest in Gilt Funds with 10-Year Constant Duration
Being a rather stable form of investment, 10-Year duration Gilt Funds are a good investment bet. If you fall into the below category, Gilt Funds with a 10-Year duration can be the investment tool for you:
- Investments are linked to financial plans and goals. As an investor, if you are looking to invest in fulfilling certain long-term goals like your retirement or your child’s foreign education, Gilt Funds with a 10-Year Constant Duration can be a good option.
- Gilt Funds invest in government securities. These funds are considered to be safer than other options and for a new risk-averse investor, it is a plausible tool of investment.
- Investors always want returns on investments. They look for the best funds that can give them the additional income, periodically. A Gilt Fund with 10-Year Constant Duration can help earn investors with higher returns than bank instruments like fixed deposits.
Gilt Funds With 10-Year Constant Duration Taxation
The Macaulay Duration of Gilt Funds with a 10-Year Constant Duration is more than three years. This means that any profit or gain received on these funds is subject to long-term capital gain tax. Once the benefits of indexation are applied, 20% is applied to the total earnings.
In case an investor wishes to sell his funds within 3 years of buying the funds, short-term capital gain tax is applicable on the returns. The amount of tax to be paid depends on the income tax slab of the investor.
Things to Keep in Mind Before Investing in Gilt Funds With 10-Year Constant Duration
- Objective: The objective of an investment is to achieve a financial goal. Depending on when you wish to fulfill your financial goal, you can invest in short-term, medium-term, and long-term investments. Gilt Funds with 10-Year Constant Duration is a good investment option if you are looking to fulfill some long-term goals and if you have the choice to stay invested for a long period.
- Duration: As the name clearly defines, the tenure of these funds is at least 10-Years.
- Risk: While there is negligible credit risk attached to Gilt Funds with a 10-Year Constant Duration, these funds do face a certain degree of risk. This risk is in the form of changing interest rates. As an investor, you will notice some degree of changes in the interest amount when the interest rates fluctuate.
- Returns: When you compare the returns on Short-Term and Medium-Term Debt Funds, the returns on Gilt Funds with 10-Year Constant Duration can be better. They perform better in a falling interest rate regime.
- Expense ratio: The charge that investors pay to fund houses to manage their portfolio Is defined as the expense ratio. Before choosing a fund house, check the charges levied by them.
Frequently Asked Questions (FAQs)
1. Are Gilt Funds with 10-Year Constant Duration a Good Investment?
Git Funds With 10-Year Constant Duration, are considered to be a rather safe investment as these funds invest in securities issued by the Government and the Reserve Bank of India.
2. Do Gilt Fund with 10-Year Constant Duration have an Exit Load?
When it comes to Gilt Funds With 10-Year Constant Duration, the exit load depends on the fund house. Many fund houses do not charge exit load.
3. What is the Lock-in Period for Gilt Funds With 10-Year Constant Duration?
Most Gilt funds do not have a lock-in period.
4. What is the Difference Between Gilt Funds and Gilt Funds With 10-Year Constant Duration?
Traditional Gilt Funds invest in various government bonds and securities for varying maturities. Gilt Fund with 10-Year Constant Duration invests in a mix of bonds for a fixed period of 10-Years. Irrespective of the interest rate fluctuations, the tenure is constant.
