Axis Mutual Fund Sees Opportunity in Gilt Funds, Backs Corporate Bonds for Stability Amid Market Volatility

Axis Mutual Fund Warns of Risks Amid West Asia Conflict

The ongoing conflict in West Asia has had a significant impact on global bond yields, with energy prices rising and concerns over stagflation amid weak growth and inflation, according to a report by Axis Mutual Fund.

In its 'Fixed Income Market Review and Outlook April 2026' report, the fund house recommended that investors opt for short- to medium-term funds with a tactical allocation of gilt funds. The report suggests that a barbell strategy is the most effective approach, balancing short-term bonds for liquidity with long-duration bonds for tactical opportunities.

Axis Mutual Fund's preferred positioning includes 2-year AA-rated corporate bonds for steady accrual and long tenor government securities for duration plays, offering a combination of consistent accrual and potential upside. For investors with a 2–3-year horizon, a short to medium duration, accrual-oriented approach, complemented by Income Plus Arbitrage strategies, remains appropriate.

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These strategies offer stable accrual, lower volatility, and tax efficiency, with arbitrage spreads often improving during periods of heightened market volatility. Over a 3–5-year horizon, structural tailwinds such as fiscal consolidation, market deepening, and India’s inclusion in global bond indices continue to support fixed income.

However, the report highlights several risks to keep in mind, including the duration of the conflict, which could impact energy markets and lead to higher term premia and sticky yields. A sustained move in crude prices towards the $100 per barrel mark could rekindle inflationary pressures and force the RBI to raise repo rates.

Excessive currency depreciation is also a risk, as higher crude prices could translate into imported inflation, currency pressures, and tighter financial conditions. Despite the current ceasefire, the situation remains highly fluid, and the report cautions that emerging economies, including India, are not immune to these risks.

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Despite these risks, the report notes that the conflict has not materially altered the medium-term interest rate outlook, and markets have already corrected sharply on fears of further rate hikes. Axis Mutual Fund expects the RBI to keep system liquidity neutral and continue its policy over the next two meetings.