Constant maturity funds offered by asset management companies allow investors to put their money in long-duration government securities all the time. In these funds, fund managers buy government bonds in a way so that the portfolio has an average maturity of 10 years.
Experts say constant maturity funds are suitable for those investors who are looking for a long-term allocation to debt and expect better returns than bank fixed deposits and are tax-efficient, too. Moreover, these funds are open-ended and one can liquidate them as per their needs.
Why invest now
Nirav Karkera, head, Research, Fisdom, views the interest rate cycle as close to the peak but not quite done as yet. “At the same time, we expect the rates to plateau for longer at the terminal rate and not reverse in haste. Longer-term yields have definitely started looking attractive though,” he says. He suggests that longer term fixed income allocators with an appetite for volatility can partially allocate towards the category while seeking to increase exposure as more clarity emerges on the rate cycle reversal.
Similarly, Santosh Joseph, founder and CEO, Germinate and Refolio Investments, says it is a great opportunity for investors right now to consider constant maturity funds because these funds help an investor manage that part of the portfolio which he would like to buy and hold for a longer period of time and are looking for stability from the portfolio. “So it becomes a very integral part of the fixed income part of the portfolio. At this juncture it makes sense to have a bit of constant maturity exposure considering that even now we are looking at a more or less sticky interest rates scenario,” he says.
What to consider before investing?
Investors must keep in mind that investing in constant maturity is not for the short-term tactical move. It is essentially a very strategic part of an investor’s portfolio and must have a longer time horizon. Investors who would like to invest for a mid to longer duration term can consider these funds.
Harshad Chetanwala, co-founder, MyWealthGrowth.com, says since these funds invest in government securities there are no issues with the credit risk. “However, one must note there will always be interest rate risk and the value of these bonds will fluctuate based on the interest rate scenario,” he says.
The 10-year constant maturity gilt funds maintain the portfolio’s residual maturity at approximately 10 years. The long maturity amplifies the duration risk carried by the portfolio, but is also the reason why such a fund can offer attractive risk-adjusted returns especially once the rate hike reversal kicks in. However, the rigid mandate on duration exposes the fund as vulnerable during increases in interest rates.
An important feature of such a fund is the deviation in the fund’s delivered returns and portfolio yield-to-maturity because of active profit booking and fund management. “Funds in the category offer very long term fixed income allocators a strong proposition. The category also serves the purpose for investors with a medium to long term horizon seeking to optimise performance basis expectations around softening interest rates,” says Karkera.
The concept of constant maturity is that an investor does not sway too much on the duration calls and investments in these funds must be done thoughtfully. Joseph of Refolio Investments says since there is no leeway to take a duration call change, constant maturity then offers an investor the stability in terms of the outcome.
“Of course, there could be times where with the movement of interest rates this fund could also run differently but it’s for a specific set of investors for a specific need in the portfolio,” he says.
Investors must note that gilt with 10-year constant duration also comes with risks as fluctuation in the market interest rates will impact the returns generated by such funds.
Looking at taxation, such funds will have long-term capital gains tax, as the maturity period is longer than three years. An investor has to pay long-term capital gains tax at 20% with indexation benefits. Short-term capital gains, if sold before one year, will attract tax at the investor’s tax slab.
Also read: Income Tax Refund 2023: How much refund taxpayers received in FY22-23?
Long-term bets
* The 10-year constant maturity gilt funds maintain the portfolio’s residual maturity at approximately 10 years
* These funds are suitable for those looking for a long-term allocation to debt and expecting better returns than bank FDs
* While there’s no issues with the credit risk, there are interest rate risks
* Constant maturity funds offers stability in terms of outcome