Is it the right time to invest in gilt funds amid rising bond yields?

Mumbai: A recent spike in bond yields has created an entry point for investors in gilt funds- holding long-duration government securities. A fall in bond yields will drive up prices and result in capital appreciation. Since bond prices and yields move inversely, a declining yield boosts the value of long-duration government securities, benefiting gilt funds.

Bond yields have risen sharply across the yield curve by 30-50 basis points in the last month, with the yield on the benchmark 10-year moving up from 6.29% to 6.6%.

"There is a tactical opportunity for investing in gilt funds given the expansion of long-end yield spreads," says Manish Banthia, Chief Investment Officer - Fixed Income, ICICI Prudential Mutual Fund. "We think the market is undervalued by about 20bps to 25bps in the 30-year G-sec & SDL segment because of sentiments and there is a case for valuations to go back to neutral."


Fund managers said the spike in bond yields comes despite several supportive factors for the debt market. The Reserve Bank of India cut policy rates by 50 basis points in June 2025 and lowered the cash reserve ratio by 100 basis points, while S&P upgraded India's sovereign rating to BBB and headline inflation fell to an eight-year low of 1.55%.

"India's bond markets have experienced notable dislocation. The recent developments have steepened the yield curve and created tactical entry points for investors," says Devang Shah, head - Fixed Income, Axis Mutual Fund.

Shah believes there is a possibility of a 15-25 basis points rally in long-duration bonds in the near term.

Fund managers said bonds could rally as RBI looks to offset growth pressures from additional tariffs by cutting rates. They also expect the central bank to conduct limited, targeted open market operations (OMOs) to help stabilise yields.

According to estimates, a 25-basis-point drop in bond yields for a portfolio with an average maturity of 15 years could lead to capital appreciation of 200-300 basis points. After adding the coupon (the annual interest paid on the bonds), investors could earn a gross return of 8.5-9.5%.

Some fixed-income analysts caution investors about the risks of this trade.

"A cut in GST rates could lead to a higher fiscal deficit and higher borrowing by the government," says Vikram Dalal, managing director, Synergee Capital. "In addition, there are expectations of inflation moving up over the next couple of years, which has currently led to yields of long-tenure bonds firming up - and this could continue."