A financial analyst and economist once said, “Discrepancies — and hence opportunities — in securities originate most often when events move faster than quotations.” This is a saying that may apply to the bond market in India today.
More specifically, the possible future benefits from long-duration bonds are likely to be limited from this time onwards, and investors may need to consider other bond classes to benefit from the bond universe.
“Given the neutral RBI stance and stable yield environment, the traditional duration play is unlikely to offer strong returns over the near term. For retail investors, this means long-duration funds may underperform compared to the past year,” says Saurav Ghosh, Co-founder of Jiraaf – a SEBI-registered bond platform.
Duration play is investments in long-duration bonds — typically bonds greater than 5 years maturity, which may extend to 40 years.
“Duration play, which is based on expectations of a fall in yield curve, is likely to be limited from a tactical perspective,” says Avnish Jain, Head – Fixed Income, Canara Robeco Asset Management Company.
Inverse Relationship
A fall in bond yields leads to capital gains, and a rise in bond yields leads to capital losses (bond yields and bond prices are inversely related). Capital gains are profits on bond positions.
The benefits of generating capital gains are limited from this point on as bond yields are expected to remain range-bound.
The benchmark 10Y Bond yields in January were around 6.80%. Today’s yields are around 6.50%. When yields fall, capital gains will accrue in bond positions; however, if yields start rising, then the situation may reverse.
“At present, Indian 10-year benchmark yields are likely to remain in a small range,” says Ranjit Jha, MD & CEO, Rurash Financials.
A cut in policy rates during the festive season could push bond prices up, but the scope for extraordinary gains from long-duration bonds, as seen in the last 8 to 12 months, is limited.
So what are the sorts of funds (MF categories) that may be affected, and what should be the outlook for investments into such instruments?
Which debt funds to invest in?
Mutual Fund categories like Long Duration Funds, Dynamic Bond Funds, and Gilt Funds are typically suited for duration plays, experts inform.
“Investors already in these funds should not panic-sell but rather evaluate their investment horizon,” says Ghosh. If the objective was to gain from past rate cuts, it’s reasonable to hold for income generation, provided the portfolio suits their risk profile. However, aggressive accumulation of such funds today is not advisable, he continues.
“If we consider conservative to mild risk-taking investors in the current volatile global environment, especially with the Tariffs, fixed income remains a safe anchor in portfolios, particularly when equity markets are running ahead of fundamentals,” says Jha.
Experts suggest that retail investors should “lock into current yields” through high-quality short/medium-term debt funds or fixed-income instruments. The current range offers a strong risk-adjusted return, especially as inflation is under check and the RBI may look at more growth-supportive measures in the upcoming policy.
“Investors can consider corporate bond funds, short-duration funds or banking PSU debt funds that have a track record of running high-quality portfolios and duration between 2-4 years,” advises Anurag Mittal, Head – Fixed Income, UTI MF.
Investors who have a more than 2-year investment horizon can also consider an income plus arbitrage fund of funds, which carries a benefit of 12.5% taxation if held for more than 2 years, Mittal continues.
“Investors may choose to increase debt allocation through investments in Short Duration Funds, Corporate Bond Funds or Banking & PSU Debt Funds based on their respective risk appetite and investment horizon in the current interest rate environment,” says Jain.
“Depending on investment horizon and risk appetite, a money market fund is best for less than a year, short short-duration fund as a parking zone and a Banking & PSU debt fund is the best for returns as a great mix of safety and yield,” says Jha.
Retail investors can benefit from the current stable yield environment by focusing on investment-grade short- and medium-term debt instruments, such as corporate bonds, that offer steady income through accruals rather than relying on capital gains from falling yields.
“Investing in Corporate Bond Funds, Short-Duration Funds, and banking and PSU Debt Funds enables them to lock in attractive yields in the 6.30–6.45% range while maintaining lower volatility,” says Ghoash.
Additionally, investing in debt funds provides diversification and professional management, which is essential in a scenario where managing interest rate risks individually can be complex.
Investors should focus on their investment horizon, risk appetite, and preference for stable income rather than speculative bets on bond price movements. “Staying invested in well-rated debt funds ensures predictable returns and shields them from sharp market moves,” says Ghosh.
Disclaimer: This story is for educational purposes only. The views and recommendations expressed are those of individual analysts or broking firms, not Mint. We advise investors to consult with certified experts before making any investment decisions, as market conditions can change rapidly and circumstances may vary.
