“There is still a lot of geopolitical uncertainty… we are still not sure where we are headed,” Shah said, pointing to risks from Middle East tensions, crude oil prices and evolving tariff dynamics. In such a backdrop, he added, “it is definitely a very good idea to have an allocation to fixed income.”
Shah noted that while changes in taxation have reduced the relative appeal of debt funds versus bank deposits, the role of fixed income in providing stability remains intact. He stressed that investors should not let short-term tax considerations override long-term portfolio discipline, especially as macroeconomic conditions turn less predictable.
Highlighting emerging risks, Shah said growth projections could come under pressure if current challenges persist, while inflation—earlier expected to remain around 4.5%—may rise above 5% in the second half of the year. He also flagged potential stress on fiscal and current account balances if crude oil prices stay elevated, warning that “the balance between growth and inflation is becoming skewed.”
From a market perspective, Hardik Shah, Fund Manager of Fixed Income at Axis Mutual Fund, outlined how bond yields have seen significant swings over the past year. Yields fell sharply to around 6.20% as markets priced in aggressive rate cuts earlier in 2025, but later climbed back to nearly 7% amid a shift in the Reserve Bank of India’s stance and heavy supply of state development loans.
“At that point, the market moved ahead of the RBI and began pricing in rate hikes,” he said, adding that geopolitical tensions further contributed to volatility.
Despite this, Devang Shah highlighted that not all segments of the debt market have underperformed. While long-duration bonds saw price volatility due to rising yields, shorter-duration instruments remained relatively stable. “Even in the last 12 months, short-term bond funds, money market funds, and liquid funds have delivered steady returns, with yields around 7% or higher,” he said.
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He advised investors to align their debt investments with their time horizon, noting that shorter-duration funds are currently better placed for those with a 12–18-month outlook. Drawing a parallel with equity valuations, Shah added that yields can serve as a useful guide in fixed income, with higher yield levels offering more attractive entry points.
The fund managers reiterated that in an uncertain macro environment, debt funds continue to play a critical role in portfolio construction, even as equities remain in focus.