Rising bond yields: How should debt fund investors manage duration risk?

The recent rise in bond yields has created duration risk for debt-fund investors. The 10-year government security (G-sec) yield closed at 6.97 per cent on September 4, up from a recent low of 6.69 per cent on July 6, 2026. Investors need to select debt fund categories carefully in the current environment and also align their choices well with their horizon.

Why yields have risen

Global developments have driven the recent rise in government bond yields.Crude oil prices are a key factor. “The ongoing energy crisis has stoked fears of higher inflation,” says Kruti Chheta, fund manager & fixed income analyst, Mirae Asset Mutual Fund. India has been hit as it is a net energy importer.

“High fiscal deficits, rising defence spending and ageing populations have compounded the fragile fundamentals of developed markets and pushed global bond yields to decade highs,” says Chheta.

What could push yields higher

A further escalation in the energy crisis could keep yields elevated. “If the energy crisis persists through the Western winter, demand could outpace supply and push energy prices and yields higher,” says Chheta.

Renewed inflation concerns could keep major central banks hawkish for longer.

“Persistently high fiscal deficits and rising defence budgets in developed economies could create a heavier bond-supply pipeline and push yields higher,” says Chheta. El Niño risk could weigh on domestic yields.

On the other hand, a diplomatic resolution could ease the energy crunch and lead to a softening of yields. “Higher supplies from economies that have ramped up production and the release of West Asia stockpiles could change the energy-supply dynamics,” says Chheta.

Markets have started pricing in rate hikes. “A meaningful decline in yields would require a major risk-off event,” says Abhishek Bisen, head of fixed income, Kotak Mutual Fund.

Chheta expects the 10-year benchmark to trade in the 6.85–7.15 per cent range over the next six months.

Longer-duration funds at higher risk

Schemes above the short-duration fund category remain vulnerable in the near term unless they have reduced their portfolio duration, according to Bisen. “Longer-duration funds can face mark-to-market volatility even when yields rise only modestly,” says Mohit Bagdi, head of investment research & founding partner, MIRA Money.

Match funds with horizon

Higher yields offer better accrual. “The current yield level offers a more attractive fixed-income entry point than the lower-yield environment earlier in the year,” says Bagdi.

Match a fund’s duration with your investment horizon. Place money needed within one year in liquid or money-market funds.

“For a one-to-three-year horizon, short-term or corporate-bond funds can be considered, while for a three-to-five-year horizon, medium-term funds can be considered,” says Anooj Mehta, partner, 1 Finance.

Beyond five years, consider gilt funds. “A gilt allocation for a horizon beyond five years should be kept as a small satellite allocation,” says Mehta.

Investors with a longer horizon can also consider gradually investing in target maturity funds. “Given the steep yield curve, a fund following a barbell strategy or maintaining a medium-duration portfolio is likely to perform well from a strategic point of view,” says Bisen.

Avoid panic exits

Investors with a horizon of more than five years should stay invested in longer-duration funds.

“Exiting now would convert a paper loss into a realised loss and mean giving up the opportunity for a potential recovery,” says Mehta. He adds that investors who have a two-to-three-year goal but put money in a gilt fund because of strong 2025 returns should correct that horizon mismatch.

The writer is a Delhi-based independent journalist