Indian fund managers are rebalancing portfolios toward fixed income as 10-year government bond yields climb to 7.18%. While professionals view these levels as an attractive entry point, they advise caution regarding potential rate volatility and market structural hurdles. Investors should note that current fixed-income strategies require a longer holding period for stability rather than quick capital gains.
Indian mutual fund managers are pivoting their investment strategies toward fixed-income securities as the 10-year government bond yield has risen to 7.18 percent, a notable increase from the 6.15 percent levels seen in June 2025. This shift reflects a move away from stretched equity valuations toward debt instruments, which now offer more predictable returns in the current macroeconomic environment.
Major fund houses are adjusting their portfolios to align with these changing market conditions. Devang Shah, the Head of Fixed Income at Axis Mutual Fund, has suggested that while current bond yields provide an appealing entry window, investors should adjust their expectations. He noted that a holding period of at least six months is advisable. Furthermore, he recommends that increasing the duration of a portfolio—which measures how sensitive the bond's price is to interest rate changes—should be planned carefully, particularly after the central bank begins its rate hike cycle.
Aditya Birla Sun Life AMC is also focusing on this area, with Co-CIO Sunaina Da Cunha advocating for a strategy that prioritizes liquidity. The firm suggests starting with short-duration funds before gradually rotating into corporate bonds with maturities of two to three years. Analysts highlight that corporate balance sheets are generally more stable than in previous tightening cycles, which makes the credit spreads—the extra interest paid on corporate bonds over government bonds—look attractive in the five-year segment.
However, the move into fixed income comes with specific risks that investors should understand. Manish Banthia, CIO of Fixed Income at ICICI Prudential AMC, pointed out that the domestic corporate bond market still faces structural challenges. Specifically, inefficient tax structures often create barriers that restrict retail investors from accessing non-AAA rated corporate instruments. This can lead to limited liquidity in lower-rated bonds.
Beyond these structural hurdles, the sector faces the risk of interest rate volatility. If the cycle of interest rate hikes intensifies beyond current market expectations, bond prices could fluctuate, impacting short-term portfolio values. Consequently, the consensus among fund managers is to focus on matching the investment timeframe with the duration of the fund, rather than attempting to guess the exact peak or trough of the market. Investors may continue to monitor interest rate decisions and the impact of tax regulations on bond market accessibility.