With the US-Israel-Iran conflict rattling markets, oil prices rising and risk assets under pressure, fixed income tends to regain appeal. In India, it is still often viewed as a conservative space dominated by bank fixed deposits and small savings schemes. But access is widening through RBI Retail Direct, online bond platforms and broker terminals. Fixed income today is not just about earning interest; returns also depend on how portfolios are positioned across interest-rate cycles and credit risk. Here, we explain the main strategies and what retail investors can take away from them.

Accrual strategy

The accrual strategy is essentially a buy-and-hold approach in bonds. Investors hold securities until maturity to earn steady interest income, much like a bank fixed deposit. It suits those seeking predictable income and capital preservation.

Beyond bank FDs, investors can consider corporate fixed deposits and non-convertible debentures issued by public and private institutions. Returns on these vary with the issuer’s credit rating. For instance, a five-year NCD from AAA-rated Power Finance Corporation offered a coupon of 6.85 per cent per annum, while Adani Enterprises, rated AA-, offered around 8.9 per cent for a similar tenure over the last five months.

Government securities are another key option. Issued by the RBI, these include central government bonds, state development loans and treasury bills, and carry minimal default risk. Retail investors can access them through RBI Retail Direct as well as online bond platforms.

Credit quality, however, remains critical. Investors should generally prefer higher-rated instruments such as AAA and AA+ to reduce default risk.

As bonds are usually held to maturity, this strategy has limited sensitivity to interim rate movements and offers relatively predictable cash flows. But it is not risk-free. Rising rates can lock investors into lower yields, and exiting before maturity may still be difficult or costly.

Within debt mutual funds, overnight, liquid and money market funds broadly follow an accrual-oriented approach.

Duration strategy

The duration strategy involves positioning bond portfolios based on the expected direction of interest rates. As bond prices and yields move inversely, investors prefer longer-duration bonds when rates are expected to fall, as these tend to gain more in price. Conversely, when rates are likely to rise, shorter-duration bonds help limit losses.

Unlike accrual investing, this approach relies more on active buying and selling and close tracking of macroeconomic indicators, yield movements and timing decisions. For this reason, it is largely used by institutional investors such as mutual funds.

Retail participation remains limited, though not absent. While platforms such as RBI Retail Direct and online bond platforms provide access, assessing yields and timing trades can be difficult without sufficient expertise. This strategy can deliver capital gains when rates fall, but it also carries higher mark-to-market risk. If interest-rate expectations go wrong, longer-duration bonds can see sharper price declines.

Within debt mutual funds, gilt funds, long duration funds and medium duration funds actively employ duration strategies. In 2024, many such funds extended portfolio maturity on expectations that rates had peaked, helping deliver around 10 per cent one-year returns as of October 31, 2024.

Target maturity strategy

Target maturity investing involves choosing bonds or funds that mature around a specific year aligned with an investor’s goal. Instead of actively trading, the portfolio is held until maturity, allowing investors to lock in yields at the time of investment. As the maturity date approaches, interest rate risk reduces and returns become more predictable.

Many investors use target maturity funds (TMFs), which are ETFs or index funds that passively track a basket of bonds with similar maturity profiles. This approach offers visibility on potential returns, lower volatility over time, and simplicity. Still, the strategy works best when aligned to the holding period. Selling before maturity can lead to price volatility, and returns are only as sound as the credit quality of the underlying portfolio. 

New TMF issuances typically come during periods of higher interest rates and are currently limited. According to ACEMF data, there are over 100 TMFs in the market. TMF ETFs can be traded on exchanges, while index fund variants can be bought or redeemed like regular mutual funds. For instance, the Bharat Bond ETF maturing in April 2031 offers a yield to maturity of around 7.5 per cent as of April 2, 2026.

Laddering strategy

A laddering strategy involves spreading investments across bonds with different maturity periods instead of concentrating on a single tenure. For example, an investor may hold bonds maturing in 1, 3, 5, 7, 10, and 20 years. As each bond matures, the proceeds are reinvested at prevailing interest rates.

This approach reduces the need to time interest rate movements. By investing and reinvesting at different points, it helps smooth out the impact of rate changes over time and provides periodic liquidity. But, it is not risk-free. The strategy still depends on the credit quality of the underlying bonds, and its staggered structure can limit upside in a strong falling-rate cycle.

Some debt mutual funds follow a similar approach in practice, even if they do not explicitly call it laddering. This is commonly seen in corporate bond funds and banking & PSU funds, where investments are spread across maturity buckets. For example, funds such as HDFC Corporate Bond Fund and ICICI Prudential Corporate Bond Fund held bonds maturing over 2 to 7 years during the post-Covid period, especially through the 2022–2023 rate hike cycle, helping balance risk and returns.

Barbell strategy

The barbell strategy involves investing at two ends of the maturity spectrum, in short-term and long-term bonds, while largely avoiding the middle segment. Short-term instruments provide liquidity and flexibility, allowing reinvestment if interest rates rise. Long-term bonds, on the other hand, offer higher yields and the potential for capital gains if rates fall.

This approach is often used when the interest rate outlook is uncertain or when the yield curve is steep. It helps balance stability and return potential, making the portfolio both defensive and opportunistic. The trade-off is that the long-end exposure can still make returns volatile, while maintaining the right balance between short and long maturities requires active monitoring.

In late 2025, Axis Mutual Fund highlighted the use of a barbell approach in its debt portfolios, allocating to short-term corporate bonds while maintaining selective exposure to long-term government and state debt.

Takeaways

Retail investors do not need to imitate institutional bond strategies, but they do need to avoid random product selection. Use accrual and target maturity products when income visibility matters. Use duration funds only when you understand interest-rate risk and can tolerate mark-to-market swings. Use laddering when you want staggered liquidity and less interest-rate timing risk. In fixed income, the biggest mistake is reaching for extra yield without understanding the trade-off in credit risk, duration risk or liquidity.

Published on April 4, 2026