Even as equity markets have remained volatile over the past 15-16 months, select debt fund categories have delivered good returns.
The top-performing funds in the medium duration mutual fund category clocked double-digit returns — up to 13.6 per cent — over the past one year. Select schemes from the corporate bond category, too, delivered strong gains.
A relatively less noticed winner has been Indian mutual funds investing in US debt ETFs/funds, which in turn invest in US Treasuries across maturities. The five Indian debt funds with exposure to US bond funds generated 8.4-14.4 per cent returns over the past year.
These US funds/ETFs have invested in Treasuries with maturities across 0-1 year, 3-7 years, 5 years and 10 years.
However, despite US Treasury fund returns appearing superior to Indian gilts, a large part of the outperformance was due to rupee depreciation.
The yield curve movement in the US and India explains much of the fund return behaviour in the last one year.
Select domestic winners
Unlike the sharp fall in US Treasury yields, longer-tenor Indian G-Secs saw only a modest decline in yields.
Despite a 125 basis points interest rate cut by the RBI, yields on 5-year and 10-year G-Secs fell by just 23 basis points and 8 basis points, respectively, over the past year. This led to relatively lower returns for domestic gilt funds.
However, the steepest yield declines happened in the shorter and medium tenor segments, with 3-year G-Secs witnessing a 55 basis points decline, while the 1-year G-Sec’s yield dropped 92 basis points.
As a result, the top medium duration funds with heavy exposure to the 3-5-year window delivered strong returns.
The top five medium duration schemes returned 8.9-13.6 per cent returns — nearly matching returns from the Indian funds investing in US debt ETFs.
By contrast, even the best-performing gilt-oriented categories — long-duration funds, gilt funds with 10-year constant maturity, and schemes tracking the Nifty 5-year G-Sec benchmark ETF — delivered only 4-8.1 per cent returns over the same period.
The 1-year category averages stood at 4.95 per cent for gilt funds, 6.94 per cent for gilt with 10-year constant maturity and 3.56 per cent for long duration funds.
Factors aiding US funds
The US Federal Reserve cut interest rates by 75 basis points during CY2025. As a result, US Treasury with 10 years to 1-year maturities saw yields fall by 41-69 basis points, triggering a bond price rally. Indian mutual funds investing in US bond ETFs report returns in rupee terms.
However, the actual dollar returns of the underlying US funds ranged from a more modest 4.2-11 per cent.
The real kicker came from currency movement. In the last one year, the rupee has depreciated 4.3 per cent against the dollar, weakening beyond ₹90, boosting rupee-denominated returns.
That said, the current yield-to-maturity on US bond ETFs are in the 3.5-4 per cent range, suggesting that the spectacular returns of the past year may not be repeated, unless the rupee-dollar factor plays a decisive role.
Investors should note that last year’s gains were driven by strong rate cuts and their impact on specific points of the yield curve.
Going ahead, rate cuts — especially in India — are likely to be slower. An accrual-driven strategy is more likely to pay off, and so return expectations need to be tempered.
Also, all Indian mutual funds investing in US bond ETFs are currently closed to fresh subscriptions.
Published on January 17, 2026