10 year gilt funds are debt-oriented funds that invest mainly in government securities. They are also known as gilt funds with 10-year constant duration. SEBI requires these funds to invest a minimum of 80% in government securities and maintain a portfolio Macaulay duration of around 10 years.

These schemes have fairly high sensitivity to interest rate movements. When interest rates fall, prices of existing bonds generally rise. This can help the NAV of a 10-year gilt fund. When rates rise, bond prices can fall, and the NAV can decline. However, these funds have very low credit or default risk because they primarily hold government securities.

These funds may make sense if you:

• If you want government securities in your portfolio: These funds keep at least 80% of their assets in government securities. This removes much of the issuer default risk you may see with corporate debt funds.
• If you are comfortable with interest rate risk: The 10-year constant duration makes these funds sensitive to interest rate changes. If rates increase, the value of your investment can drop.
• If you have a long-term goal: Due to high interest rate sensitivity, these schemes can be highly volatile. If you have a long investment horizon, it can help you ride through the short-term fluctuations smoothly.
• If you want an alternative to corporate debt funds: When you compare these funds with other debt funds like corporate bond funds, the risk changes. You can add gilt funds for better risk balancing.

When you buy units of a 10-year gilt mutual fund, you basically invest in long-term government bonds. The fund manager manages the portfolio and adjusts holdings to maintain the required constant 10-year duration exposure. The bonds that get close to maturity are replaced with longer-dated government securities.

To understand better, let's consider a scenario. Suppose you invest ₹12,000 in a 10-year gilt scheme when the NAV is ₹60. You receive 200 units of the fund.

Now imagine that the market rates fall. The prices of the existing government bonds will increase. If this pushes your investment's NAV to ₹65, your 200 units would be worth ₹13,000 (200 units x ₹65), giving you a profit of ₹1,000.

Now consider the opposite. If the interest rates rise and the NAV falls to ₹58, your investment would be worth ₹11,600 (200 units x ₹58). This movement happens even though the fund holds government securities.

Note that apart from interest rate changes, there are many factors that affect your investment value, such as inflation, expense ratio, liquidity and other market conditions.

• Direct exposure to the government bond market: You get access to a portfolio of government securities through a mutual fund rather than buying and managing individual bonds yourself. This can be simpler for a new investor.
• Low credit-related risks: Since these schemes mainly invest in government bonds, you don't have to worry about whether a company can repay its debt.
• Potential benefit from falling interest rates: When interest rates decline, prices of existing bonds can increase. And since these funds maintain a long duration, the benefit can be significant.
• Clear duration strategy: Unlike regular gilt mutual fund schemes, which can invest in government securities with different maturities, this category specifically targets a 10-year constant duration portfolio.

• NAV can fall even though the government is the issuer: Government securities have very low default risk, but their market prices still change. You can lose money if you redeem when the NAV is lower than your purchase price.
• High interest rate risk: This is the main risk. A 10-year duration means the NAV can react strongly if market interest rates increase. Any sudden spike can make the NAV fall significantly.
• Short-term volatility can be high: Factors like changes in inflation expectations, RBI policy, bond yields and market demand can affect government bond prices.
• Returns are not fixed: These funds don't promise a particular interest rate or annual return. Your result depends on the movement of the underlying securities and other portfolio factors.

If you want lower interest rate sensitivity, consider other debt schemes with lower duration, such as medium-duration funds, short-duration funds, or money market funds.

A 10-year gilt fund, long-duration fund, and dynamic bond fund all have longer-duration portfolios, but their risks, returns, volatility, and flexibility differ. Here's a quick comparison:

A regular gilt fund is another option if you want government securities but do not specifically want a 10-year constant duration strategy.

When looking for the best 10 year gilt mutual funds, don't judge them only by their average return. A few other details also matter, such as:

• Check how closely the fund follows its duration target: Look at the portfolio's Macaulay duration and see whether it stays close to the intended 10-year range.
• Compare performance across interest-rate cycles: Check how the fund behaved when bond yields were rising and when they were falling. This gives you more context than a single year's return.
• Look at rolling returns: Rolling returns can show how the fund performed over different investment periods. They are useful when comparing schemes because they reduce dependence on one particular start date.
• Check the expense ratio: Two funds may follow similar strategies but charge different expenses. Costs can make a difference to your final return over time.
• Read the riskometer: These funds can carry a high level of interest rate risk. The riskometer gives you an additional view of the scheme's overall risk level.
• Check the exit load: Some schemes may charge an exit load for early redemption. Know the applicable conditions before investing.

The best 10 year gilt funds for you may be the right choice for someone else. Your time horizon and ability to handle the NAV fluctuations should come before the returns.

Once you've decided to start a long-term investment in gilt funds, setting up a SIP on Millions is pretty simple:

• Download the Millions app from the iOS App Store or Google Play Store. 
• Open your free account by verifying your details and completing KYC.
• After logging in, search for the 10-year gilt funds and select the one that matches your investment needs.
• Click on 'SIP' and select daily, weekly or monthly investing.
• Enter the amount, choose your SIP date, and complete the payment.

Your SIP is Live! A 10 year gilt mutual fund isn't about short-term gains. It is about taking a specific position in long-term government bonds. If you're in a different spot right now and need a short-term option, you can consider liquid funds or low duration funds. For long-term wealth building, however, there are various equity funds you can explore.