The Reserve Bank of India’s recent decision to maintain the repo rate has opened a window of opportunity for fixed-income investors to consider short-duration bond funds. These funds are benefiting from stable yields, and their primary goal is to generate steady interest income without exposing investors to the sharp fluctuations often seen in long-term bonds.
Some of the top-performing short-duration bond funds, such as those from Axis Mutual Fund and Nippon India Mutual Fund, have delivered impressive results around ten percent in the past six months and close to nine percent over the last year. This performance highlights the strength of shorter-term debt instruments in a market where long-duration bonds may have already exhausted much of their upside.
One of the reasons short-duration strategies are gaining traction is the current shape of the yield curve. It has flattened significantly, and bonds with maturities between one and three years are now offering attractive returns without taking on too much duration risk. Since there is limited room for further rate cuts by the central bank, the appeal of long-duration bonds has weakened.
Financial advisors are recommending a balanced approach to fixed-income allocation, often referred to as the barbell strategy. This involves allocating the bulk of the portfolio about seventy percent to short-tenure, accrual-focused instruments for stability and predictable income. The remaining portion can be invested in select long-duration assets, providing some potential for capital gains if interest rates decline in the future. This blend allows investors to benefit from steady returns while still leaving room for upside from favourable rate movements.
For those specifically targeting short-duration opportunities, money market funds and corporate bond funds are currently attractive options. Money market funds focus on securities with maturities of up to one year, while corporate bond funds often invest in high-quality, slightly longer-term instruments. Both categories tend to offer a good balance of yield and stability, making them suitable for conservative investors as well as those looking for tactical opportunities.
At the same time, experts suggest it might be a good moment to book profits in long-duration bonds. Over the past year and a half, long-duration government securities have delivered strong returns as yields dropped and demand remained strong. This rally was driven by macroeconomic easing, fiscal discipline, and favourable supply-demand conditions. However, with much of the expected monetary easing already reflected in current prices, further gains may be limited in the near term. Shifting part of these profits into shorter-duration strategies could help lock in gains while reducing portfolio volatility.
Before making any moves, investors should ensure that the duration of their chosen fund aligns with their own investment horizon. This alignment reduces the impact of short-term market swings and helps maximise returns from interest accrual. Assessing the credit quality of the portfolio is also crucial, with a preference for AAA-rated securities or sovereign paper to limit credit risk. Funds with a track record of managing liquidity efficiently and maintaining low modified duration are generally better suited for conservative strategies.
Matching the duration of your investment with the duration of the fund is one of the most effective ways to avoid reinvestment and interest rate risk. In the current environment, where yields on shorter maturities are attractive and rate cuts are unlikely in the immediate future, moving towards short-duration bond funds could be a well-timed strategy.
For more insights on debt markets, mutual funds, and smart personal finance strategies, follow YouFinance on Instagram and Facebook.
