Kamal Ghorui
Why are bond yields rising?Bond yields are climbing due to a combination of rising crude oil prices and a weakening rupee, both of which add to inflationary pressures. India’s 10-year benchmark yield has risen to around 7% from 6.68% a month ago. Crude oil prices have surged to $115–$120 per barrel, and with India importing nearly 85% of its oil needs, higher prices feed directly into domestic inflation through increased transportation and production costs. At the same time, the rupee has depreciated to around 95 against the US dollar, making imports more expensive. In such an environment, investors demand higher yields to compensate for inflation and currency risks. Tightening liquidity conditions and expectations of higher interest rates further push bond prices lower and yields higher. When bond prices fall, yields rise and vice versa.Impact of rising yields on debt MFsThe impact varies depending on the type of fund and the maturity of securities it holds. Long-duration funds, such as gilt and long-term bond funds, are the most affected. These funds invest in bonds with longer maturities, making them more sensitive to interest rate movements. Even a small rise in yields can lead to sharper price declines, resulting in noticeable short-term losses. Short-duration funds, such as liquid, ultra-short, and low-duration funds, are far less impacted. Since they invest in short-maturity instruments, price fluctuations are limited. As older securities mature, these funds are able to invest in newer bonds offering higher interest rates, which gradually improves their returns. According to Value Research data, values of long-duration funds have shrunk about 2.5% over the past three months. Gilt funds are down around 1.4%, while dynamic bond funds have seen relatively limited declines of about 0.4% over the same period.What should investors do?Investors in long duration or gilt funds should avoid panic selling if their investment horizon is 3–5 years. Over time, accrual income and potential yield softening can help offset interim losses. For investors with a shorter time horizon, such as less than a year, liquid and ultra-short duration funds are more suitable. These funds carry lower interest rate risk and offer relatively stable returns. Investors looking to benefit from potential capital appreciation in gilt funds should wait for clearer signs of stability in crude oil prices.
