Indian Debt Fund Managers Shift to Tactical Strategies Amid Declining Returns

Indian debt fund managers are increasingly favoring tactical asset allocation over passive duration exposure, as persistent yield compression erodes returns across the bond spectrum. With benchmark 10-year government bond yields hovering near 7.4%, down from 7.9% in early 2024, the margin for capital appreciation has narrowed significantly, prompting a strategic pivot. Managers now prioritize sector rotation and credit quality selection, particularly in infrastructure and public sector bank paper. For instance, SBI Infrastructure Bonds (SBIINFRA) have seen a 12% increase in fund holdings since Q3 2024, while exposure to ICICI Bank’s corporate bonds (ICICIBANK) rose by 8% in December 2025, reflecting a preference for higher-quality issuers with stable cash flows. These moves are part of a broader effort to generate alpha in a low-yield environment. The shift is also evident in fund-level performance. According to recent portfolio disclosures, the average duration of open-ended debt funds declined from 4.8 years in January 2024 to 3.9 years by December 2025, signaling a deliberate reduction in interest rate risk. Meanwhile, the turnover ratio in the debt fund segment rose to 2.3x in FY25, up from 1.7x in the prior year, indicating more frequent trading and active management. This tactical repositioning affects market liquidity and pricing efficiency. Increased demand for high-quality credits has compressed spreads, with AAA-rated infrastructure bonds now trading at just 65 bps over government securities—down from 90 bps in early 2024. Institutional investors, including insurance companies and pension funds, are closely monitoring these shifts, as they recalibrate their own fixed income strategies amid uncertain rate trajectories.