The RBI’s latest policy decision to keep the repo rate unchanged has delivered an unpleasant surprise to the bond market. Traders and investors were positioned for an easing signal, but the central bank chose to stay put. Government bond yields shot up after the RBI decision was announced, with the benchmark 10-year bond yield climbing to 6.73%.Rising bond yields is bad news for debt fund investors. Bond prices and bond yields move in opposite directions. When yields rise, existing bonds with lower coupons become less attractive, so their prices fall, leading to an immediate drop in NAVs.The impact of the surge in bond yields was not uniform across categories. Mutual funds holding long-term bonds, especially gilt funds and long duration funds, were the worst hit. The long-duration category lost 0.75% and the gilt category fell 0.61% in a single day, wiping out gains of the past three months. Medium duration funds and dynamic bond funds also saw sharp losses of 29-35 basis points because they carry meaningful interest-rate sensitivity.Short-term funds, however, were relatively insulated. Their portfolios consist largely of bonds and money market instruments with very short maturities. Since these securities mature soon, they are less affected by changes in long-term yields. In simple terms, their NAVs don’t swing as wildly when the market re-prices interest rates. The category slipped 14 basis points on Friday.Market experts now believe that India’s rate-cutting cycle is over. Instead of a quick easing phase, the more likely scenario is a prolonged pause. “We expect the curve to steepen incrementally and yields to gradually rise on the back of higher gross borrowings in the current fiscal,” says Puneet Pal, Head of Fixed Income at PGIM India Mutual Fund. Others also expect the pain to continue. “The bearishness in the bond market, driven by a mix of structural, cyclical, and one-off factors, is likely to persist through the rest of 2026-27, with the benchmark 10-year bond yield hovering in the 6.60–6.75% range,” says Madhavi Arora, Chief Economist, Emkay Global Financial Services.What should investors doIf your debt fund portfolio is tilted towards long duration, gilt or aggressive dynamic bond funds, it may be time to reassess. These categories work best when interest rates are falling, because bond prices rise sharply and funds benefit from capital gains. But when yields rise, even gradually, these funds can deliver negative returns for weeks or months, and the volatility can be unsettling for investors who entered expecting “fixed-income-like” stability.If your goal is parking money for 6 months to 3 years, avoid long duration exposure. Instead, the safer approach in the current cycle is to stay with short-term debt funds and focus on accrual. Short duration funds, money market funds, and high-quality corporate bond funds with low maturity profiles tend to generate returns largely through interest income rather than bond price gains. This accrual strategy is typically steadier, and it reduces the risk of sudden NAV shocks when yields spike.Long-term debt funds are not “bad”, but they require the right timing and the ability to tolerate volatility. Right now, with the market shifting from rate-cut hopes to a higher-yield reality, most retail investors are better off staying short, earning accrual, and letting the interest-rate noise pass.(Disclaimer: Times of India does not give any personal finance or stock market investment advice. Always consult an expert before taking investment decisions)
