ETMarkets Smart Talk | Yields are attractive, but stagger fixed-income investments amid volatility: Devang Shah of Axis MF

Bond yields have turned increasingly attractive following the recent sell-off, but investors should resist the temptation to make aggressive duration bets amid an uncertain global backdrop.

In an interaction with Kshitij Anand of ETMarkets, Devang Shah, Head – Fixed Income at Axis Mutual Fund, said investors should consider building their fixed-income allocation gradually and focus on high-quality instruments, as oil prices, global interest rates and liquidity conditions could continue to fuel volatility in the bond market. Edited Excerpts -

Q) We have seen bond yields rise, liquidity tighten and expectations around the RBI's next policy move shift. What has fundamentally changed in India's fixed-income market over the past few weeks?


A) There are three main concerns that we see, one is on external sectors, second that oil prices have continued to remain higher for longer and third part is worries on overall inflation on account of higher food, oil and commodity inflation this has changed the macro-economic dynamics for India.

The recent move has also been impactive by global bond markets. Markets have also become increasingly cautious about liquidity conditions and the possibility of an additional policy tightening.

However, policymakers have continued to communicate a calibrated approach, and we believe the market has already priced in a meaningful amount of this risk. India's growth remains resilient and external buffers remain relatively strong. We expect inflation to inch up and RBI to remain calibrated tightening unless oil prices flare up beyond 125$.

Q) Given the October 27–28 policy meeting. Looking beyond this week's meeting, what is your base case for the Fed's policy trajectory through the first quarter of 2027, and what developments could change that outlook?

A) We expect the Fed to hike rates by 25-50 odd bps till March 2027.

Q) Could a more hawkish Fed trigger further pressure on the rupee and foreign portfolio flows into Indian debt, even if the RBI keeps domestic rates unchanged?

A) Fed rates are already restrictive. Higher oil prices if it persists for higher than longer would put pressure on the rupee and foreign portfolio flows into Indian debt even if RBI keeps domestic rates unchanged.

Q) How should investors choose between fixed deposits, government securities and debt mutual funds?

A) Currently, the way bond markets have sold off and the rise in yields has been by 75 – 100 odd bps across the curve makes fixed income as an important part of your asset allocation.

The sell off as explained above is on the account of various reasons but today the bond market yields are so attractive that we have not seen them in the last 10 years and hence fixed income definitively becomes a decent part of your asset allocation.

The choice between fixed deposits, government securities and debt mutual funds should be guided by an investor's investment horizon, liquidity needs and return expectations.

Fixed deposits may be suitable for investors seeking certainty of returns and capital stability over a defined tenure.

Government securities, on the other hand, offer sovereign-backed safety and can be attractive for investors willing to hold bonds directly and manage interest-rate movements.

Debt mutual funds provide professional portfolio management, diversification across issuers and maturities, and access to a broader opportunity set within fixed income. They also offer investors the flexibility to choose strategies aligned with different objectives, ranging from liquidity management and short-term parking of funds to income generation and duration-led opportunities.

Rather than viewing these options as substitutes, investors should consider them as complementary components of a broader fixed-income allocation. The optimal choice ultimately depends on the investor's goals, liquidity requirements and risk appetite.

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Q) What is your outlook for interest rates and bond yields over the next three to six months?

A) Over the next three to six months, we expect bond yields to remain range-bound with periods of volatility driven by global developments, particularly oil prices and the trajectory of global interest rates. Domestic growth remains resilient and inflation risks continue to be monitored closely.

While markets have repriced rate expectations in recent weeks, we believe a significant portion of the anticipated tightening is already reflected in current yield levels. Accordingly, we will gradually add duration across portfolios.

We believe current 10-year G-Sec yield, 30-year G-sec yield and 3-year AAA corporate bonds offer an attractive entry point for investors. Having said that, volatility is expected to persist in the near term, and accumulation should be staggered over the next 3 months, Q4FY27, may offer a good entry point for investment in short duration high-quality fixed income instruments.

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Q) What is the one fixed-income strategy investors should avoid in the current environment?

A) One strategy investors should avoid in the current environment is making aggressive duration calls based solely on expectations of an imminent decline in interest rates. While current yield levels are attractive and create opportunities in fixed income, the global backdrop remains uncertain, with factors such as US rates, commodity prices and liquidity conditions continuing to influence markets.

Rather than attempting to time the interest-rate cycle, investors should adopt a more balanced and gradual approach to fixed-income allocation. We believe focusing on high-quality portfolios and building duration incrementally is a more prudent strategy than taking concentrated positions based on a single market outcome.

In the current environment, discipline and diversification are likely to be rewarded more than aggressive market timing.

Q) Debt mutual funds saw outflows of ₹1.83 lakh crore in September. Should investors interpret this as a loss of confidence in fixed income, or was it largely a temporary liquidity-management phenomenon?

A) Investors should not see this as loss of confidence in fixed income funds. Largely this has been on the account of temporary liquidity management or working capital requirement of corporates.

Most of the categories which have seen outflows are very short end of the curve, which are funds like liquid fund and money market fund where most of the money comes back into the system in the first month of the coming quarter. This is very seasonal and more for liquidity management.

Q) Should investors favour short-duration and money-market funds in the current environment, or does the rise in yields create an opportunity to gradually lock into longer-duration funds?

A) We had been advising investors to stay at the short end of the curve last year but now as yields have become significantly attractive the time has come for investors to start building gradual allocations to duration funds and as explained above, in duration funds and short-term medium-term funds, 3 – 5 year corporate bonds and 10 year, 30 year G-secs but we would advocate a measured approach rather than going all into duration funds today.

Current yield levels are attractive and support the case for selectively increasing exposure to longer-duration assets over time. However, given the evolving global backdrop and lingering uncertainty around oil prices and interest-rate expectations, duration should be built progressively. This allows investors to lock into attractive yields while maintaining flexibility in the event of further market volatility.

Source: BSE/ NSE Indices/ Bloomberg/ RBI/ Axis MF Internal Research

(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)