Long duration debt mutual funds (MFs) have borne the brunt of the surge in government securities (g-sec) yields in recent months. Investors in dynamic bond and g-sec funds with greater exposure to longer-maturity papers have also seen a sharp erosion in near-term returns.
The average return of long-duration funds has fallen to 3.7 per cent over the past year, according to Value Research. The figure stood at 7.6 per cent at the start of August 2025 and nearly 11 per cent at the start of the year, data from the Association of Mutual Funds in India (Amfi) shows.
After declining steadily since March 2023, g-sec yields have reversed course in the past month.
Yields on 15-year and 30-year papers jumped about 30 basis points in August, hitting their highest levels this year. The 30-year g-sec yield stood at 7.3 per cent on Monday, up from a recent low of 6.76 per cent in April 2025.
Analysts point to expectations of higher government borrowing, including state development loans (SDLs), as well as higher inflation forecasts and the possibility of rate hikes. “With the government announcing GST revamp, the markets are expecting increased supply of g-sec and SDLs,” said Shriram Ramanathan, CIO, fixed-income, HSBC MF.
A rise in yields typically hurts investors, as it drives bond prices lower. The effect is amplified in longer-tenure securities.
But the spike in yields is also creating opportunities. “The first phase of the rise in yields largely pertained to demand-supply issues in the long duration. But lately, there is general fatigue in the market with respect to absorbing bond supply. This has opened up attractive valuations not just at the long end, but also elsewhere on the yield curve,” said Choudhary, adding that his current preference is for 14–15-year g-secs, which have been hit the hardest.
Ramanathan said he is also looking to add g-secs after cutting exposure in August. “Through July and August, we had reduced our exposure to the longer-end g-sec segment and increased allocation to 2–4 year corporate bonds as spreads looked favourable. With g-sec yields now at more attractive levels, we are incrementally looking to tactically add exposure to the longer end,” he said.
Long-duration funds, which manage more than ~20,000 crore, are among the higher-risk debt offerings as they are mandated to maintain a portfolio Macaulay duration of over seven years.
As of July, these schemes had an average maturity of nearly 26 years and a Macaulay duration of 11.6 years. The three largest schemes in the category had the majority of their portfolios in g-secs maturing beyond 2050.