 "Mutual fund")
What is a constant maturity gilt fund?
In most categories of funds, fund managers have the leeway to alter the average duration of the fund, based on their interest rate outlook. When interest rates are expected to fall, they increase the average duration of their fund, and vice versa. But sometimes, fund managers can get their duration calls wrong. They may increase the average duration of their fund in anticipation of a decline in interest rates, but rates may harden instead.
Constant maturity gilt funds guard against the risk of wrong duration calls by fund managers. These funds keep their average duration constant.
Do these funds carry no risk at all?
In India, many of these funds invest in gilts having an average maturity of 10 years, which makes them quite sensitive to interest rate changes. If you are holding these funds, and interest rates begin to rise, these funds could give you negative returns.
