Gilt Funds & 10-Year Constant Duration Gilt Funds: Anchoring Your Portfolio With Government Securities

Imagine you have a friend who asks to borrow ₹1 Lakh. This friend is reliable, has never defaulted on a payment, and actually prints their own money. Would you be worried about them running away with your cash? Probably not.

In the world of investing, the Government of India is that friend.

For first-time investors in India, the stock market can feel like a roller coaster. You want better returns than a Fixed Deposit (FD), but you are terrified of losing your principal. Enter Gilt Funds—the mutual funds that lend strictly to the Sovereign.

But within this safe haven, there is a specific, slightly more aggressive beast known as the 10-Year Constant Duration Gilt Fund. It sounds complicated, but by the end of this guide, you will understand precisely how it works, why it’s unique, and whether it deserves a spot in your portfolio.

Contents hide

1 What Are Gilt Funds? (The Basics)

2 What is a 10-Year Constant Duration Gilt Fund?

3 Normal Gilt Funds vs. 10-Year Constant Duration

4 Why Focus on Government Securities?

5 The Risks: It’s Not All Sunshine

6 Who Should Invest?

7 Taxation: The New Rules (Important!)

8 Frequently Asked Questions (FAQs)

9 Final Words

10 Top 10 Recommended Readings

What Are Gilt Funds? (The Basics)

“Gilt” refers to “Gilt-edged securities.” In the past, high-value government bonds were printed on paper with gold (gilt) edges to signify their high quality.

A Gilt Fund is a debt mutual fund that invests at least 80% of its assets in Government Securities (G-Secs) issued by the Reserve Bank of India (RBI) on behalf of the Central or State Governments.

The “Lending to the Government” Analogy

When you put money in an FD, you are lending to a bank. The bank pays you interest.

When you put money in a Gilt Fund, you are effectively lending to the Government of India. The Government pays you interest (coupons).

Why are they special?

Zero Credit Risk: The Government of India cannot “default” in the traditional sense because it has sovereign power (and the ability to print currency or raise taxes). Your capital is credit-risk free.
Liquidity: Unlike FDs with lock-in periods, you can withdraw your money from a Gilt Fund anytime (though exit loads may apply for very short durations).

What is a 10-Year Constant Duration Gilt Fund?

This is where things get interesting. A standard Gilt Fund has a fund manager who buys and sells government bonds of various maturities (3 years, 5 years, 15 years) based on their view of the market.

A 10-Year Constant Duration Gilt Fund is different. SEBI mandates that the fund’s Macaulay Duration (a measure of interest rate sensitivity) be approximately 10 years.

The “Sports Team” Analogy

Think of a standard Gilt Fund like a cricket team whose average age changes. Sometimes the captain picks young players (short-term bonds), and sometimes they pick veterans (long-term bonds).

Now, think of a 10-Year Constant Duration Fund like a High School Under-16 team.

The players must always be under 16.
As soon as a player gets too old (a bond nears maturity and its duration drops), they are “graduated” (sold).
A new, younger player (a fresh 10-year bond) is brought in to replace them.

The Result: The portfolio’s “age” (duration) never declines. It stays for 10 years.

Normal Gilt Funds vs. 10-Year Constant Duration

Here is a quick comparison to help you distinguish between the two:

Feature	Normal Gilt Fund	10-Year Constant Duration Gilt Fund
Strategy	Active. The manager changes the duration based on interest rate views.	Passive/Rule-based. The manager must maintain a 10-year duration.
Flexibility	High. Can hold short-term or long-term bonds.	Low. Must hold long-term bonds generally.
Interest Rate Risk	Variable (Low to High).	Very High (Constant).
Best For	Investors who trust the fund manager’s calls.	Investors who have a specific view on falling interest rates.

Why Focus on Government Securities?

If you are a first-time investor, you might ask: “Why bother with Gilts if I can just buy an FD?”

1. The “Sovereign Guarantee.”

Bank FDs are insured only up to ₹5 Lakh by the DICGC. If you have ₹50 Lakh in a single bank and it collapses, your money is at risk. Gilt funds invest in papers backed by the Government. It is the highest level of credit default protection available in the Indian financial system.

2. The Magic of Capital Appreciation

This is the secret sauce. FDs give you interest only. Gilt funds offer interest and capital appreciation.

Bond prices and Interest rates move in opposite directions.
If interest rates fall, the price of existing bonds goes up.
If interest rates rise, the price of existing bonds goes down.

Because 10-Year Constant Duration funds hold long-term bonds, they are susceptible to changes in interest rates. If the RBI cuts interest rates by 1%, the value of these funds could theoretically jump by ~10% (simplified estimation). This potential for “equity-like returns” in a debt product is why savvy investors use them.

The Risks: It’s Not All Sunshine

Do not let the word “Government” fool you into thinking “Risk-Free.” While there is no Credit Risk, there is massive Interest Rate Risk.

The Seesaw Effect

Scenario A (Good): The economy slows down. RBI cuts rates. Your 10-Year Constant Duration fund zooms up in value. You are happy.
Scenario B (Bad): Inflation rises. RBI increases interest rates. Bond prices crash. Because your fund is forced to hold 10-year bonds, it takes a heavy hit. You might see negative returns for months or even a year.

Warning: 10-Year Constant Duration funds can be very volatile. They are not a replacement for your emergency fund or money you need in 6 months.

Who Should Invest?

This fund category is not for everyone. It is best suited for:

The “Fill-it-Shut-it-Forget-it” Investor: You want to park money for 5–10 years and don’t want to track the fund manager’s strategy.
The Asset Allocator: You have a lot of equity (stocks) and need a safe, negative-correlation asset. When the economy crashes (and stocks fall), central banks usually cut rates, which makes gilt funds rise. They act as a hedge.
The Rate Cycle Watcher: You believe interest rates in India are at a peak and will fall over the next few years.

Taxation: The New Rules (Important!)

If you are reading older blog posts, you might see “Indexation benefits.” Forget that. The rules changed recently.

For investments made on or after April 1, 2023:

Classification: Gilt funds are classified as Debt Mutual Funds.
Tax Rate: Gains are added to your annual income and taxed at your Income Tax Slab Rate.
Indexation: None.

Example:

You are in the 30% tax slab.
You invest ₹1 Lakh. It grows to ₹1.10 Lakh in 3 years.
Profit = ₹10,000.
Tax = 30% of ₹10,000 = ₹3,000.

Note: If you invested BEFORE April 1, 2023, you still enjoy the old 20% tax with indexation benefit if held for >3 years.

Frequently Asked Questions (FAQs)

1. Can I lose money in a Gilt Fund?

Yes. You will not lose money because the government defaulted, but you can see a temporary drop in your portfolio value if interest rates rise sharply. If you panic and sell at that moment, you book a loss.

2. Is this better than PPF (Public Provident Fund)?

PPF is safer because the returns are guaranteed and tax-free (EEE). However, PPF has a 15-year lock-in period and a deposit limit of ₹1.5 lakh per year. Gilt funds have no limits and better liquidity, but they are taxable and volatile.

3. What is the average return I can expect?

Historically, long-term Gilt funds have delivered returns close to 7%–9%. However, past performance is not a guarantee of future results. In rising rate cycles, returns can drop to 4%–5% or lower.

4. How much of my portfolio should be in this?

For a first-time investor building a debt portfolio, you might allocate 10–20% of your debt allocation here. Do not put your entire savings into a Constant Duration fund.

Final Words

Investing in a 10-Year Constant Duration Gilt Fund is like anchoring your boat in the harbour. The anchor (Government Security) ensures the ship won’t drift away (Credit Risk), but the waves (Interest Rates) will still rock the boat.

For Indian investors, these funds offer a unique blend of sovereign safety and the potential for high returns during falling interest-rate cycles. If you have a long-term horizon (5+ years) and the stomach to see your debt portfolio fluctuate slightly, these funds are an excellent tool to diversify away from pure Equity and fixed-return FDs.

Gilt Funds & 10-Year Constant Duration Gilt Funds: Anchoring Your Portfolio with Government Securities