Why 2026 is the year to reset debt allocation in portfolios, Bhavdeep Bhatt of Northern Arc Investment Managers decodes

After years of equity-led portfolio construction, 2026 could mark a turning point for debt allocation, as investors reassess risk, returns, and the need for stability across market cycles.

Speaking to Kshitij Anand of ETMarkets, Bhavdeep Bhatt, CEO of Northern Arc Investment Managers, argues that while India’s growth momentum and domestic liquidity remain strong, the sharp decline in debt allocation within retail portfolios calls for a strategic reset.

With corporate and government balance sheets healthier, private credit delivering predictable cash flows, and volatility in global macros and currencies persisting, Bhatt explains why debt—especially high-quality and private credit—deserves a more meaningful role in portfolios heading into 2026. Edited Excerpts –

Q) We have hit fresh record highs in November, with a 10% gain so far this year. How are we placed for 2026?
A) Yes, the economic growth momentum is very strong and the domestic liquidity super cycle is even stronger, supporting a rather well priced equity market. What is really striking is the changing liability profile of the corporate segment, both in terms of the level and the composition.


Corporates have seen a significant deleveraging on one side making the balance sheet stronger and the shareholder composition also changing with more retail investor participation buying out promoters, private equity and FIIs.

As a case in point, in last two fiscals, we have seen on an average one IPO every working day! In 2026, we may see some more time correction rather than price correction, given the balance sheet strengths of government and corporate India and accommodative retail liquidity.

The Debt allocation in a retail investment portfolio has come down over the last few years. We believe that there is a case for resetting and rebalancing that.

At Northern Arc Investment Managers, our positioning is firmly anchored in providing credit solutions by bridging the demand and supply of credit solutions.

Our strategy is centred on deepening our core performing credit franchise through diversified, sector-specific funds, spanning money market, investment-grade and structured credit, with gross return targets ranging from 10% to 15%.

In parallel, we are expanding offshore investor participation through GIFT City–based and appropriately structured vehicles, creating efficient access to India’s private credit opportunities while maintaining our core focus on credit quality, risk discipline and consistent outcomes.

We are also investing meaningfully in technology-led underwriting and ESG-aligned portfolio monitoring, which strengthens resilience across cycles. Equally important is our focus on impact-led credit across MSMEs, education, healthcare and clean energy, sectors that continue to demonstrate durable demand and structural growth. As we move into 2026, our confidence stems from the scalability of this platform and the depth of opportunity in Indian private credit.

Q) How have your AIF funds performed so far in 2025?
A) Across our open ended and close ended private credit franchise, we have witnessed resilient credit performance. Our AIF platform has delivered strong and consistent performance across market cycles, reflecting disciplined underwriting, diversified portfolio construction and active risk management.

This is evident in the outcomes of fully exited funds, where gross returns have consistently ranged between 13% and 15%, validating our ability to deliver on stated objectives across strategies and tenures.

The current portfolio of active funds continues to offer attractive yield visibility, with gross YTMs ranging from 10% to 15% across money market, investment-grade and sector-focused credit strategies, this consistency across exited funds, active AIFs and PMS reinforces our ability to deliver resilient, risk-adjusted returns through varying market environments.

Our Credit AIF franchise is also well complemented by our Discretionary and Non-Discretionary PMS offerings, which apply the same credit discipline through curated portfolios of listed, senior-secured portfolios for our individual and corporate clientele. In short, credit is gaining increasing interest, backed by robust and resilient performance over the last decade.

Q) Over the last 16 years, how has Northern Arc built a differentiated model within India’s retail credit ecosystem, especially for segments traditionally overlooked by mainstream lenders?
A) Over the last 16 years, we have built a differentiated credit platform by consistently addressing segments that remain underserved by traditional lenders, particularly mid-market enterprises and retail-focused sectors.

Our model operates through a dual-lens approach—combining performing credit with impact-oriented investing.

On one hand, we focus on disciplined underwriting, structured products and risk-adjusted returns; on the other, we channel capital to early-stage, under collateralised and high-potential borrowers that are often excluded from mainstream balance sheets.

This approach has enabled Northern Arc Investment Managers to deploy over ₹15,000 crore cumulatively, while delivering a weighted average XIRR of ~15% across six matured funds.

Importantly, all exited funds have achieved zero capital loss for investors, demonstrating that impact and credit discipline can coexist at scale.

Q) Rupee hit a fresh low against the USD, surpassing the 90-mark. Are we on our way to breach the 100-mark against the USD? What is causing the fall? Will it impact your debt portfolio?
A) The recent weakness in the rupee, including briefly crossing the 90-mark against the US dollar, is largely driven by global factors such as a strong dollar environment, foreign portfolio outflows, higher US interest rates, and India’s trade and current account dynamics.

These are cyclical macro forces rather than signals of domestic credit stress. Importantly, a straight-line move to 100 is not inevitable, currency levels are market-determined, and the RBI actively manages excessive volatility.

Historically, rupee depreciation has tended to be gradual and orderly, reflecting external adjustments rather than systemic risk.

From a debt AIF perspective, particularly in BBB and above domestic credit, the impact is minimal. Our portfolios are predominantly rupee-denominated, with cash flows linked to issuer fundamentals, operating performance, leverage, liquidity and asset cover not as much by currency movements.

Most issuers in our universe have limited unhedged foreign currency exposure, reducing any domino effect from FX volatility. While currency weakness can have indirect macro implications (such as inflation or yield movements), these influence market pricing rather than credit quality.

As a result, we believe we are well positioned to continue delivering stable, risk-adjusted returns, even in a volatile global environment, anchored by strong credit selection and disciplined underwriting.

Q) Northern Arc operates across six focused sectors, from MSME and microfinance to affordable housing and agriculture. Which of these segments is seeing the strongest demand in 2026?
A) In FY26, the strongest demand is clearly concentrated in India’s MSME segment, which has become the centrepiece of the credit cycle.

The incremental lending to these enterprises under priority-sector norms surged to ₹3.74 lakh crore between April and October 2025 alone, far outpacing previous years and setting the stage for total MSME credit expansion of ₹6.4 lakh crore in FY26, nearly 5.5 times the 16‑year average.

This surge reflects buoyant activity across engineering, construction, textiles, and transport equipment, with micro and small firms driving much of the momentum.

Their rising share of loan inquiries, particularly from tier‑2 and tier‑3 cities, underscores both the scale of demand and the ongoing challenge of converting inquiries into disbursals due to documentation and credit history gaps.

Medium enterprises are also seeing double‑digit growth, but the most pronounced acceleration is in micro and small businesses, reinforced by NBFCs’ aggressive expansion.

NBFCs reported a 32% CAGR in MSME lending between FY21 and FY24, lifting MSME loans to 9.1% of their total portfolio, compared with slower growth in private and public sector banks.

This rapid scaling reflects both formalisation through GSTN, UPI, and e‑invoice adoption, and the strong domestic growth impulses tied to private consumption and capital formation.

Despite persistent delayed‑payment pressures and stricter asset‑quality norms, micro and small enterprises remain the segment with the strongest demand in 2026, anchoring India’s broader credit and GDP expansion trajectory.

Q) If someone wants to invest say Rs 10 lakh in 2026 who is in the age bracket of 30-40 years - what should be the ideal strategy?
A) AIFs are excellent for private credit exposure; they are designed by regulators specifically for ‘sophisticated investors’ like HNIs and UHNIs with statutory minimum entry of ₹1 Crore.

While equity has an inevitable role to play in creating wealth in long term, the cashflows and predicable high income through the cycles is equally important for balancing the investment portfolio.

Northern Arc Investment Managers offers strategies with gross return targets between 10% and 17%, allowing investors to align allocations with their risk appetite.

For the investor and investment profile you mentioned in the question, I would suggest an asset allocation of 70:20:10. 70% across 3 multi cap funds for growth, 20% in 2 corporate bond funds for accrual and potential capital gain and 10% in Gold ETF to hedge against global macro risks and currency depreciation.

Q) What were your big learnings from the year 2025 you would want to share with readers?
A) As an investor, 2025 highlighted that ‘Secured Growth’ like MSME and Housing is far superior to ‘Unsecured Scale’. It also proved that the RBI's proactive stance on liquidity and regulation is the ultimate safety net for our markets.

As we head into 2026, the mantra remains: stay diversified, respect the debt cycle, and follow the consumer. Despite global trade disruptions, India’s structural resilience driven by manufacturing revival, strong domestic consumption, and proactive RBI intervention remained intact.

As a wise man once said, “You can stop an invasion of an army, but not the idea whose time has come”. India is the Idea whose time has come!

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