The Debt Playbook: How a search for stable returns is fuelling fixed income’s quiet revival

For investors who don’t have the stomach for the gut-wrenching ups and downs of the equities market, fixed income investing is making a quiet comeback with the promise of a smoother ride.

For years, bonds and debt mutual funds were eclipsed by equities as they were seen as low-return investments. But that no longer holds true. Rising bond yields, improving credit quality and wider mutual fund choices have reshaped the risk–reward balance at a time equity valuations look stretched.

Nikhil Aggarwal, founder & Group CEO, Grip Invest, says debt mutual funds are now a serious alternative to fixed deposits (FDs). “Debt MFs, especially liquid schemes and AAA-rated corporate bond fund schemes, are highly liquid, with nil to low exit rates, and exposure predominantly to sovereign credit of the government of India or some of India’s largest corporates,” he says, adding that FD rates have fallen after recent repo rate cuts. “Several debt schemes and Indian bonds have delivered steady returns.”

Over the last several years, bond returns have averaged 7–8% annually, with much lower volatility than equities, say experts. One reason for is the rapidly expanding bond market. Funds raised via debt securities through the primary market have risen steadily over the past decade, reflecting the government’s growing reliance on market borrowings. After remaining below Rs 5 lakh crore in FY15 and FY16, debt sales accelerated post-pandemic, crossing Rs 9 lakh crore in FY21 and reaching a record Rs 13.37 lakh crore in FY25, underscoring the increasing role of debt markets in financing fiscal needs.

The shift is visible not only in domestic portfolios. National Securities Depository Ltd data shows a clear trend: foreign portfolio investors (FPIs) have reduced exposure to equities in recent years but their interest in Indian debt has increased. After strong equity inflows in FY21, FPIs were net sellers of equities in FY22 and FY23. Equity flows remained volatile in FY25 too, but debt saw steady inflows, amid global uncertainty.

In FY24, FPIs invested Rs 1.2 lakh crore in debt, followed by Rs 1.36 lakh crore in FY25. In 2025, till November, equities saw net outflows, while debt continued to attract steady inflows. This gap reflects a broader global trend, where investors are looking for stability, predictable income, and better downside protection. The dominance of equities is being challenged.

Debt Funds vs Bank FDs

With multiple repo rate cuts by the Reserve Bank of India (RBI), bank FD rates have come down. In contrast, several debt mutual fund categories are offering attractive yields, along with flexibility and tax efficiency.

Vikas Garg, Head of Fixed Income at Invesco Mutual Fund, says: “Prudently selected debt funds can be as safe as FDs and offer anytime liquidity. Gross yields of debt mutual fund are looking more attractive as FD yields have come down with the RBI’s 125 basis points repo rate cut in CY2025”.

“Debt mutual funds can offer capital gain opportunities as current market yields are elevated and expected to drop on the back of the RBI’s policy rate cuts and open market G-Sec purchases,” he adds.

Experts also stress caution. Murthy Nagarajan, Head of Fixed Income, Tata Asset Management, highlights the risk angle. “Debt mutual funds carry different levels of risk: liquidity risk, credit risk and interest rate risk, which may be higher than the risk carried by bank FDs.” His advice is clear: “Investors need to consult their financial advisors about suitability of any product based on their risk appetite.”

Still, the gap in returns is clear. “Corporate bond fund and short-term debt mutual fund schemes’ yields to maturity are close to 7% levels, while Gilt funds are nearer 7.25%. Bank FDs are in the range of 6.5%,” says Nagarajan.

Falling Rates

Interest rate cycles play a crucial role in debt fund returns. When rates fall, bond prices rise, and funds holding longer-maturity bonds benefit more.

“Long-duration debt funds deliver stronger returns when interest rates fall as their higher modified duration amplifies price gains on existing higher-yield bonds,” says Aggarwal. At the same time, shorter-duration funds are less sensitive and provide better protection if rates move up again, he says.

Nagarajan supports this view. “Gilt funds and corporate bond funds seek to benefit from falling interest rates due to higher maturity of the fund.”

Garg of Invesco explains the outlook by focusing on different parts of the yield curve. “In a conventional falling interest rate scenario, longer duration funds produce higher capital gains.” At the current juncture, Garg see attractive risk-reward for 5-10 year G-Secs with favourable demand and one-five year corporate bonds with elevated spreads. He says “debt fund categories like low duration, short term and corporate bond provide measured participation in these opportunities.”

What Worked

Performance trends over the last year underline the importance of fund selection. “Over the past year, credit risk and medium-duration funds have outperformed with average returns up to 10.5%, benefitting from credit spread tightening amid RBI rate cuts,” says Aggarwal. He believes short- to medium-term funds continue to offer balanced risk-adjusted returns.

Nagarajan attributes recent outperformance mainly to accrual. “Corporate bond fund did well due to higher maturity and accrual of the portfolio.”

Garg provides a market-structure explanation. He says short-term and corporate bond funds did well because they were less exposed when the yield curve steepened. “Short-term and corporate bond funds, being largely positioned in up to 10-year segment, were lesser impacted by the steepening yield curve.”

Currency movements add another layer of complexity. A weakening rupee can influence bond markets through inflation, foreign flows, and RBI policy decisions. Garg says a weaker rupee “reduces flexibility of the RBI to act freely on its monetary policy,” raises imported inflation, and can lead to selling of domestic securities by foreign investors, impacting the demand-supply dynamics.

Direct Investing

How can retail investors buy government bonds? What is the minimum investment amount, and how easy is it to buy and sell these bonds? These are the key questions that come to the minds of new investors when they consider bonds. One important recent development is that access to government bonds has become much easier for retail investors, as investment platforms and exchanges have significantly lowered entry barriers.

Aggarwal highlights this shift: “Retail investors can invest directly in government bonds through online bond platform providers.” The minimum investment can be as low as “Rs 100, making them highly accessible.” While secondary market liquidity is still a concern, he notes that platforms are improving flexibility with features like “sell anytime,” even if subject to a short lock-in. 

@PrinceInMedia