Debt Fund Strategy 2025: Balancing Returns and Risk

After the Reserve Bank of India (RBI) unexpectedly cut interest rates by 50 basis points and reduced the cash reserve ratio in early June 2025, it is likely to pump a massive `2.5 lakh crore into the banking system. This was a big move and signalled that the RBI might have done most of its rate cuts upfront. The result? Shortterm government bond yields dropped quickly, especially in the 2- to 5-year range. However, longerterm bonds didn’t move much, indicating the market had already expected the RBI’s softer tone.[EasyDNNnews:PaidContentStart]

Over the past year, funds that invest in long-term government bonds have done really well. But I think their best days may be behind them—unless we get another surprise from the RBI, which is very unlikely. So, my suggestion to you all is to use a ‘barbell’ strategy—keeping a small portion in long-term funds just in case we get some gains, but shifting most of my money to short- and medium-term Debt Funds.

These shorter-duration funds are better suited for today’s environment. They’re less sensitive to interest rate swings and can still benefit from falling short-term yields and improving returns from corporate bonds. However, I’m being cautious on long-duration bond funds, as recent price swings in long-term funds have shown that even safe government bonds can lose value in the short term.

For most investors, I believe short- and mediumduration debt funds offer a sensible middle ground. They provide better returns than fixed deposits, are easy to exit, and don’t carry too much risk if rates move unexpectedly. For those willing to take a bit more risk and stay invested longer, some exposure to long-term funds can still work—but do not expect much from it.

Shashikant Singh
Executive Editor

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