The returns are indifferent because in the last year, RBI had resorted to liquidity-tightening to curb the sharp volatility in the rupee. This led to spiraling of bond (government and corporate) yields and lower returns. Though bond yields continue to be elevated, the rupee has turned and inflation is easing.  Consumer Price Index based inflation stood at 7.31 in June, against 8.28 in May.

Many fund houses are adding long-term papers to their portfolios, believing that the rate rise regime is behind us. Even the financial advisors, too, seem bullish on these schemes. Suresh Sadagopan of Ladder7 Financial Advisories said while the trajectory RBI might take isn’t known, it is felt the central bank might either go for sharp cuts in interest rates or take a gradual approach. His advice to the investors is like the investment horizon should be at least two years.

There were changes announced in the Union Budget, regarding the guidelines for tax incidence in debt funds. For instance if one stays invested in these funds for more than 36 months, long-term capital gains tax 20 per cent with indexation benefits will be imposed. If these are redeemed earlier, the capital gains will be added to the income and the tax rate will be according to the income tax slab applicable. 

Also the investors who are in the 10 per cent and 20 per cent income tax brackets can invest in bond funds, even if they wish to withdraw before three years. Investors in the 30 per cent income tax bracket should only invest the part of their portfolio they do not wish to withdraw in the next three years.