25% and inflation expected to remain elevated, the fixed-income landscape could be entering a phase where investors may need to rethink duration and deployment strategies. Rather than locking into long-duration bonds at current yields, Puneet Pal, Head – Fixed Income at PGIM India Mutual Fund, believes investors should stay nimble and wait for potentially higher yield levels as the rate cycle evolves.

So, how should investors deploy ₹1 crore in fixed income with a three-year horizon? Pal recommends a staggered approach, with 40% in ultra-short-term funds, 20% in money market funds, 20% in liquid funds and 20% in short-duration funds.

He believes this allocation can provide flexibility to gradually move into mediumand long-duration funds when yields become more attractive. In an interview with Kshitij Anand of ETMarkets, Pal also explains why bond funds may have an edge over buying individual bonds, how investors should think about FDs versus debt mutual funds from a tax-efficiency perspective, and why bonds should be viewed not as “boring” investments but as an important source of stability and diversification in a long-term portfolio.

25%, are we still in an environment where investors can lock in attractive yields, or has the best part of the rate cycle already passed? A) We are of the view that the MPC will hike rates going ahead given their Inflation projections of above 5% for the next three quarters and yields have little scope to move down from current levels.

Q) Is it better to lock in a 7% yield on a high-quality bond today or wait for potentially higher yields if inflation or oil prices push rates up? A) We are of the view that it’s better to avoid high duration and wait for potentially higher yield levels.

Given the ongoing geopolitical uncertainty and elevated yields across the developed market space , we believe its better to invest in shorter duration money market funds right now. Q) If you had ₹1 crore to deploy in fixed income today with a three-year horizon, how would you construct the portfolio?

A) As we expect yields to rise, we will avoid long duration funds currently and will invest the corpus as 40% in Ultra short term Funds , 20% in money market Funds, 20% in Liquid Fund and 20% in short duration funds. As and when yields start rising ,we will shift allocation from Ultra, money market and liquid funds into medium and long duration funds.

We would reiterate that investors should invest in line with their risk appetite and investment horizons. Q) How should investors divide their fixed-income allocation between government bonds, AAA corporate bonds, credit opportunities and money-market instruments?