Should you invest in gilt fund with 10 years constant duration?

Due to the lucrative returns that are seen from the equity mutual funds, people usually refrain from investing in debt MFs. For their debt part of the allocation, they usually prefer FDs (Fixed Deposits), RDs (Recurring Deposits), PPF (Public Provident Fund) and insurance policies to name a few. On top of that, when it comes to the long term, people are more inclined towards equity rather than debt, which actually is the right perception. However, at times your risk profile may not permit you to invest in equities even if you have a long-term view. Generally, people fail to understand that even debt mutual funds can prove to be the better option as compared to the aforementioned debt options. So now the question is, are these gilt funds with 10-year constant duration worth your attention?

As per SEBI’s (Securities and Exchange Board of India) circular on re-categorization, gilt funds with 10-year constant duration are defined as the funds which invest minimum 80 per cent of the assets in government securities such that the Macaulay duration of the portfolio is equal to 10 years. So, basically, these funds invest in the safest instruments known as government securities which usually gets SOV or Sovereign rating from the credit rating agencies. This means that these securities are backed by the government and is unlikely to default. Though they can be termed as virtually risk-free, technically they are subject to sovereign risk.

If we look at the average rate of return provided by these funds in 1-year, 2-year, 3-year, 5-year and 10-year, we find that they have generated a CAGR (Compounded Annual Growth Rate) of 10.11 per cent, 8.57 per cent, 9.63 per cent and 7.84 per cent, respectively. Though, as of now, there are very few options available in this space, but moving forward we can expect other fund houses would launch new funds in this category. This fund is ideal for a conservative risk taker and even to play safe, a moderate risk taker with long term time horizon can invest in these. However, aggressive risk takers can ignore this and rather invest in equity or credit risk funds if at all they wish to invest in debt for the long term.