Why avoid 10 Year constant maturity funds now?

10 year constant maturity gilt funds invest in government securities maturing in 10 years. The aim is to keep the duration of the fund (and interest rate risk too) constant. When interest rates rise bond prices fall, which makes these schemes post losses.

According to Value Research, these schemes on an average has lost 2.4 percent over one year ended May 31, 2022. As on April 30, 2022 five schemes in this category managed assets worth Rs 1,419 crore. In an inflationary environment, the RBI is expected to continue rising interest rates. Rising bond yields should hurt these schemes and hence they are best avoided if you cannot match your investment time frame with scheme’s duration.