Long-duration debt funds are currently under significant pressure amid rising bond yields and shifting interest rate expectations, prompting investors to question whether they should continue investing in this segment or move away altogether.

Experts speaking to Zee Business, however, caution against a blanket exit and instead emphasise a more nuanced, horizon-based approach.

Explaining the current turbulence, Kshitiz Mahajan, CEO of Complete Circle Wealth, said debt mutual funds should not be equated with fixed deposits, as many investors tend to assume.

He highlighted that fixed income funds carry multiple risks, including credit risk, liquidity risk, default risk, and mark-to-market risk, since the underlying securities are actively traded like equities.

According to him, the key issue today lies in the inverse relationship between bond prices and yields. As yields rise, bond prices fall, directly impacting the Net Asset Value (NAVs) of debt funds.

Mahajan pointed out that when investors expected interest rates to fall, returns looked attractive. However, in the current cycle, yields on government securities have moved higher, leading to lower NAVs and muted or negative returns in long-duration funds.

The impact is most visible in long-duration and gilt funds, which hold longer maturity bonds and are therefore highly sensitive to interest rate changes.

Nitesh Buddhadev, Founder of Nimit Consultancy, explained that these funds are seeing the sharpest mark-to-market losses due to their higher duration exposure.

He noted that in some cases, returns have been significantly impacted:

• Long-duration funds have shown near-flat 3-month returns (around 0.04 per cent)
• One-year returns in some categories are around -2.2 per cent
• Certain 10-year gilt fund categories have seen short-term declines as high as -15 per cent

Buddhadev added that the rise in government bond yields, which have moved up sharply over the past year, has already been priced into markets as investors anticipate potential future rate hikes.

Despite the negative sentiment, both experts emphasised that this is not a structural failure of debt funds but a cycle-driven movement.

Mahajan stressed that investors should not panic or resort to selling simply because NAVs are falling, as losses remain notional unless units are redeemed. If held till maturity or aligned with the investment horizon, the volatility can even out.

Experts advised investors to be selective and avoid excessive exposure to high-duration or lower-quality credit segments in the current environment.

Mahajan recommended focusing on:

• Government securities (gilt funds) for safer exposure
• PSU and banking PSU debt funds
• High-quality corporate bond funds
• Shorter-duration or appropriately matched-duration strategies

He also warned against investing in low-credit-quality papers, noting past instances where even AAA-rated issuers faced stress.

Instead of exiting debt funds entirely, experts suggest aligning investments with financial goals:

• Short-term money (3–12 months): Liquid, overnight, or ultra-short duration funds
• 1–2 years horizon: Money market or arbitrage funds
• 3–5 years horizon: Banking and PSU debt funds or high-quality corporate bond funds
• Long-term horizon: Select gilt funds only if investors expect interest rates to decline

Mahajan also reiterated that debt should remain part of a balanced portfolio, typically around 15–20 per cent allocation, depending on risk profile.

Both experts agree that long-duration debt funds are currently under pressure due to rising yields and interest rate uncertainty. However, they do not recommend a complete exit.

Instead, investors are advised to:

• Match fund duration with investment horizon
• Avoid panic selling during NAV drawdowns
• Prefer high-quality, lower-duration debt instruments in volatile cycles
• Revisit allocation strategy rather than reacting to short-term performance

As Nitesh Buddhadev summed up, “Mark-to-market losses are temporary. If the interest rate cycle reverses in the coming months or years, long-duration funds can recover—but timing and suitability matter more than chasing past returns.”