MFs recalibrate portfolios as bond sentiment improves
October 12, 2025
Indian debt fund managers are increasing their allocation to longer duration bonds following the RBI's dovish October Monetary Policy, which signalled a high likelihood of future rate cuts.
With the bond market entering the second half of the financial year in a positive mood backed by the Monetary Policy that has left the room open for more rate cuts, asset management companies are also beginning to recalibrate their strategies to add longer duration papers, said fixed income heads and debt fund managers.
“In the short term, the outlook is relatively positive, reflecting more of a tactical shift in positioning with a slight increase in duration bonds (15 years and above). This is mainly based on expectations that market sentiment might improve further and there could be a minor pullback,” said Rajeev Radhakrishnan, CIO – fixed income, SBI Mutual Fund.
Agreeing to that, Devang Shah, head – fixed income, Axis Mutual Fund said that they have followed the similar strategy by slightly adding the duration bonds after the October policy.
For instance, SBI Mutual Fund’s long duration fund is fully invested with a cash position barely at 2.76%, according to the August 2025 factsheet, as against a cash position of 10.62% in July.
Post the June policy, the cash position had increased following a rate cut, but post the August and October policy fund managers are more confident and investing in long dated security. The mutual funds had reduced their long-term bonds and shifted to short-end of the curve since the June policy when the stance had been changed to ‘neutral’ from ‘accommodative’, anticipating no more rate cut on the table. The weak demand-supply dynamics and fiscal worries due to GST rationalisation further exacerbated the situation, leading to more sell-off by fund houses.
The sell-off took the yield on the 10-year bond to 6.65% level in August. However, the yields eased on realisation of lower-than-expected impact from GST slab tweaks. It further came down as the government reduced supply at the longer-end and RBI delivered a hawkish policy in October, indicating at least one-two rate cuts ahead. On Friday, the 6.33% 10-year bond closed at 6.54%. Followed by the policy, the yield flattened, with the spread between 10-year and 30-year falling to 56 bps from an average of 72 bps in August.
“In the short term, the outlook is relatively positive, reflecting more of a tactical shift in positioning with a slight increase in duration bonds (15 years and above). This is mainly based on expectations that market sentiment might improve further and there could be a minor pullback,” said Rajeev Radhakrishnan, CIO – fixed income, SBI Mutual Fund.
Agreeing to that, Devang Shah, head – fixed income, Axis Mutual Fund said that they have followed the similar strategy by slightly adding the duration bonds after the October policy.
For instance, SBI Mutual Fund’s long duration fund is fully invested with a cash position barely at 2.76%, according to the August 2025 factsheet, as against a cash position of 10.62% in July.
Post the June policy, the cash position had increased following a rate cut, but post the August and October policy fund managers are more confident and investing in long dated security. The mutual funds had reduced their long-term bonds and shifted to short-end of the curve since the June policy when the stance had been changed to ‘neutral’ from ‘accommodative’, anticipating no more rate cut on the table. The weak demand-supply dynamics and fiscal worries due to GST rationalisation further exacerbated the situation, leading to more sell-off by fund houses.
The sell-off took the yield on the 10-year bond to 6.65% level in August. However, the yields eased on realisation of lower-than-expected impact from GST slab tweaks. It further came down as the government reduced supply at the longer-end and RBI delivered a hawkish policy in October, indicating at least one-two rate cuts ahead. On Friday, the 6.33% 10-year bond closed at 6.54%. Followed by the policy, the yield flattened, with the spread between 10-year and 30-year falling to 56 bps from an average of 72 bps in August.