Gilt Funds vs Gilt Constant Maturity Funds: Which Is Better?

Gilt Funds vs Gilt Constant Maturity Funds—this is a common dilemma for investors looking to invest in government securities through mutual funds. Both these fund types invest primarily in government bonds but differ in their portfolio strategies and risk profiles. In this article, we analyze 19 years of historical data from two popular SBI gilt funds to help you understand their performance, average maturity trends, and which option might be better suited for your investment goals.

Gilt Funds vs Gilt Constant Maturity Funds: Which Is Better?

When investors seek debt mutual funds backed by the Government of India with zero credit risk, Gilt Funds and Gilt Constant Maturity Funds often come into the picture. Although both invest primarily in Government securities (G-Secs), their risk-return dynamics and portfolio characteristics differ significantly.

In this article, we will provide a comprehensive comparison of Gilt Funds vs Gilt Constant Maturity Funds, referencing SEBI’s definitions, rolling return data from the oldest funds in each category, and a practical case study to understand which one might suit your investment goals better.

What Are Gilt Funds?

Gilt Funds are debt mutual funds that invest at least 80% of their corpus in Government securities of varying maturities. These funds carry very low credit risk because the underlying securities are backed by the central government. However, they are exposed to interest rate risk depending on the average maturity of their holdings.

SEBI Definition:

“A Gilt Fund will invest a minimum of 80% of its total assets in Government securities across maturities.”

This flexibility allows fund managers to adjust the portfolio between short-term and long-term G-Secs depending on their interest rate outlook.

What Are Gilt Constant Maturity Funds?

Gilt Constant Maturity Funds invest at least 80% of their corpus in Government securities with a fixed maturity horizon, typically targeting a portfolio duration of 10 years. This makes them more sensitive to interest rate movements but potentially more rewarding during falling interest rate cycles.

SEBI Definition:

“A Gilt with 10-year Constant Duration Fund will invest a minimum of 80% of its total assets in G-Secs such that the Macaulay duration of the portfolio is equal to 10 years.”

Such funds effectively mimic a long-term government bond index, providing transparent interest rate sensitivity and consistent duration exposure.

Key Differences Between Gilt and Gilt Constant Maturity Funds

To compare and understand the risk and returns, I have taken two funds of the SBI Mutual Fund company. One is SBI Magnum Gilt and the one is SBI Magnum Gilt Constant Maturity Fund. I have taken the daily NAV data from 3rd April 2006 to the last available NAV data. This forms around 19 years of daily data points (around 4695). Let us first understand the drawdown of both the funds.

In the initial years, you noticed that the drawdown is more for SBI Magnum Gilt Vs SBI Magnum Gilt Constant Maturity Fund (especially before 2017). I will explain the reason for this later.

Now, let us look into rolling returns for 1 year, 3 years, and 5 years period.

You noticed that for 1-year rolling returns, up to 2017, SBI Magnum Gilt looks more volatile than SBI Magnum Gilt Constant Maturity Fund. The same follows for 3-year rolling returns and 5-year rolling returns.

Why Was SBI Magnum Gilt More Volatile Before 2017 and Not Now?

Looking at average maturity trends sheds light on this:

SBI Magnum Gilt Fund — Average Maturity Trend

• Pre-2017: The fund held longer-duration securities, often with maturities around 12-14 years to maximize yield and capital gains potential during falling interest rates.
• Post-2017: SEBI’s recategorization introduced stricter guidelines, prompting the fund to reduce average maturity to around 5-7 years, lowering interest rate risk and aligning with the Gilt Fund category’s risk profile.

SBI Magnum Gilt Constant Maturity Fund — Average Maturity Trend

• Maintained a relatively stable average maturity consistently around 8-10 years, reflecting its constant maturity mandate.

Average Maturity Summary (Approximate)

Taxation of Both Funds

Both categories are taxed as debt funds:

• Short Term (holding < 3 years): Taxed at individual income tax slab rate.
• Long Term (holding > 3 years, investments before 1 April 2023): 20% capital gains tax with indexation.
• For investments on or after 1 April 2023: Taxed as per slab rates without indexation (Budget 2023 change).

When to Choose Which?

Risks to Keep in Mind

• Gilt Funds carry interest rate risk, especially if duration is extended during falling rate bets.
• Constant Maturity Funds can suffer sharp NAV declines in rising rate environments due to high duration.
• Neither fund type suits very short-term goals or investors expecting equity-like returns.

Final Verdict – Which is Better?

There’s no absolute winner. Your choice depends on:

• Your investment horizon
• Your risk appetite
• Your interest rate outlook

For investors willing to tolerate volatility for higher returns in falling rate cycles and with a long time frame, Gilt Constant Maturity Funds can deliver superior results.

For those preferring relatively stable NAVs and moderate risk, traditional Gilt Funds remain attractive.

Both have important roles in a diversified debt portfolio, especially after credit crises in other debt categories, providing a safer haven for capital preservation.

Conclusion

Don’t pick debt funds solely on past returns. Understand your goals, risk tolerance, and time horizon. Use rolling return data for insights into consistency rather than point-to-point gains.

Gilt and Gilt Constant Maturity Funds serve distinct purposes — and selecting the right one can positively impact your long-term debt investment strategy.

Refer to our earlier articles on Debt Mutual Funds Basics at “Debt Mutual Funds Basics“