India Debt Fund Managers Turn Tactical as Returns Tumble
Overview
India's top debt fund managers are adopting a cautious strategy amid anticipated lower returns and a nearing end to the RBI's interest-rate cut cycle. Firms like Axis AMC and Bandhan AMC are increasing cash holdings, while SBI Funds Management favors state bonds for their higher spreads. This tactical shift prioritizes stability and accrual over directional duration bets seen last year, as Indian government bonds posted their lowest returns in three years during 2025.
India's Debt Market Faces Tactical Shift
India's leading debt fund managers are pivoting to a more cautious investment stance, anticipating a challenging year for fixed-income returns. This strategic adjustment comes as the Reserve Bank of India (RBI) nears the conclusion of its interest-rate reduction cycle, coinciding with subdued demand from key investor segments.
Cash Holdings Rise Amid Yield Concerns
Firms like Axis Asset Management Co. and Bandhan AMC Ltd. are bolstering their cash reserves, seeking better investment opportunities. This move signals a departure from the previous year's preference for longer-duration assets, when aggressive rate cuts by the RBI spurred a hunt for yield. However, with yields showing persistence and potential range-bound movement, the scope for significant capital gains appears limited.
State Bonds and Shorter Durations Gain Traction
Some fund houses, notably SBI Funds Management Ltd., are finding state government bonds attractive due to their relatively higher yield spreads. Meanwhile, others, such as Aditya Birla Sun Life AMC Ltd., are placing bets on shorter-duration corporate debt. These strategies reflect a focus on stability and income generation (accrual) rather than speculative directional bets on interest rate movements.
Diminishing Returns Highlight Tactical Approach
Indian government bonds delivered an average return of 6.7% in rupee terms for 2025, marking the lowest figure in three years, according to Bloomberg data. This trend reinforces the notion that the era of substantial capital appreciation in fixed income may be pausing. "Duration remains tactical in the current environment," noted Rajeev Radhakrishnan, chief investment officer for fixed income at SBI Funds, emphasizing the need to prioritize stability and accrual over broad duration strategies given the macroeconomic dynamics and the current phase of the rate cycle.
