Mutual funds in India are expected to increase their investments in short-term corporate bonds in the coming weeks, buoyed by a surge in inflows and surplus liquidity, according to fund managers. In May 2025, corporate bond funds recorded net inflows of ₹119.8 billion (approximately $1.40 billion)—the highest in two years and more than triple the April total—data from the Association of Mutual Funds in India (AMFI) showed.
This spike in inflows comes at a time when liquidity in the banking system remains in surplus. Fund managers anticipate that investment focus will shift primarily to bonds maturing within three years due to expectations of rising yields in longer tenors.
“Liquidity is in surplus, so there could be some flows, but investments should shift to the up to three-year segment,” said Akhil Mittal, Senior Fund Manager – Fixed Income at Tata Asset Management. He added that May’s activity had largely concentrated in three- to five-year papers, aligning with corporate issuances in that segment.
While the Reserve Bank of India (RBI) recently signaled an end to its rate-cutting cycle, fund managers still see sustained demand for short-term bonds. “Corporate bond spreads were looking attractive in May as the yield curve began to steepen from being flat to inverted,” noted Mahendra Kumar Jajoo, CIO – Fixed Income at Mirae Asset Investment Managers (India).
Yields on AAA-rated two- and three-year corporate bonds fell by 25–28 basis points (bps) in May, with five-year bonds easing by 22 bps, according to LSEG data. However, since the RBI’s 50-bps rate cut and policy stance shift to ‘neutral’ last week, longer-duration government and corporate bond yields have edged up by 10–12 bps.
Despite this, yields on short-term corporate bonds (up to three years) remain about 10 bps below their end-May levels, keeping them attractive for fresh investment. “The corporate bond curve, especially in the up to three-year space, could still steepen from current levels,” said Anurag Mittal, Head of Fixed Income at UTI Asset Management.
