Navigating 2026 Fixed Income Allocation After a Turbulent 2025
We have entered 2026, and financial planners are actively discussing asset allocation strategies for the new year. Each asset class serves a unique purpose in an investor's portfolio. Achieving the correct mix depends entirely on your personal goals and risk tolerance.
Equities drive growth but can be highly volatile in the short term, as 2025 clearly demonstrated. Gold acts as a hedge against inflation and a safe haven during uncertainty. Last year, gold performed this role exceptionally well. With inflation lower in 2026, it remains uncertain whether gold will continue to shine so brightly.
Fixed income provides essential stability. In 2025, interest rates on fixed deposits declined, while government bond yields increased. Corporate bond rates moderated somewhat but remained steady.
Reviewing 2025: A Year of Divergent Asset Performance
2025 witnessed sharply different trends across various asset classes. Precious metals, particularly gold and silver, experienced a phenomenal run. Gold delivered a staggering return of over 70%, while silver achieved an eye-popping gain exceeding 150%.
In comparison, the Nifty 50 index provided a decent 10% return. However, this performance was largely overshadowed by the massive outperformance of gold and silver. Equity markets faced significant volatility due to geopolitical uncertainty, regional conflicts, trade wars, and tariffs. These same factors propelled gold's success while restraining equity growth.
Within the fixed income segment, bank deposit rates and government bond yields moved in opposite directions. Most banks reduced fixed deposit interest rates by 100 to 150 basis points during 2025. Savings account rates were also cut by most institutions.
While bank deposit rates fell, yields on Government Securities (G-Secs) moved upward. The yield on the 10-year G-Sec declined initially from a high near 6.80% to a low around 6.20% in the first few months. From that point, yields rose steadily to approximately 6.65%. Currently, with the RBI Repo Rate at 5.35%, the 10-year G-Sec yield hovers around 6.65%.
Fixed Income Allocation Options for 2026
Investors have several choices within the fixed income category for the coming year.
1. Bank Fixed Deposits
As noted, 2025 saw bank fixed deposit rates decrease by 100 to 150 basis points. Currently, most public and private sector banks offer interest rates between 6.00% and 6.75% per annum on 1 to 3-year fixed deposits. Some small finance banks provide rates up to 7.50% p.a. for similar tenures. Senior citizens typically earn an additional 0.50% p.a.
Last year, before the RBI began cutting rates, fixed deposit rates peaked in the current cycle. Investors who locked in those high rates are now benefiting. In 2026, fixed deposit rates appear less attractive than they were in 2025.
2. Government Securities
Yields on 10-year Government Securities have climbed steadily over recent months. Key announcements in the upcoming Union Budget regarding fiscal deficit targets and government borrowing will be crucial to monitor.
Other factors influencing G-Sec yields include FPI flows, the inclusion of Indian G-Secs in global bond indices, changes in weightage within existing indices, RBI liquidity management, and INR stability.
For short-term horizons, investors might consider low-duration or short-duration debt funds. These funds are less sensitive to interest rate changes and benefit from interest accrual.
For long-term horizons, long-duration debt funds could be an option. These funds can generate capital gains if bond yields soften, but rising yields would negatively impact returns.
3. Small Savings Schemes
Small Savings Schemes include Post Office Fixed Deposits, the Senior Citizens Savings Scheme (SCSS), National Savings Certificate (NSC), and Public Provident Fund (PPF). Interest rates on these products have remained unchanged for the last couple of years.
Current rates are decent: SCSS and Sukanya Samriddhi Account offer 8.2%, NSC provides 7.7%, 5-year FD gives 7.5%, and PPF yields 7.1%. Investors who contribute regularly to schemes like SSA or PPF should continue their practice.
4. Corporate Bonds
In 2025, corporate bond interest rates declined alongside bank fixed deposits as the RBI reduced the Repo Rate. However, most corporate bonds still pay higher rates than bank deposits. While 1 to 3-year bank FDs offer 6.00% to 6.75% p.a., corporate bonds of similar tenure typically range between 7.00% and 12% p.a.
The rate on a corporate bond depends on the issuer's financial health, credit rating, bond tenure, market rates, and other factors. Bonds can be categorized by issuer, tenure, credit rating, interest payment frequency, and security.
Based on individual risk profiles, investors can choose suitable bond types and investment amounts. Consulting a qualified financial advisor for risk profiling and specific recommendations is advisable.
Determining Your Fixed Income Allocation
Fixed-income products provide crucial stability to an investment portfolio. When stock markets turn volatile, the fixed-income portion cushions the overall portfolio.
The appropriate allocation to fixed income depends on multiple factors:
- Investor's age
- Risk profile
- Return expectations
- Investment time horizon
- Market interest rates
- Overall market conditions
A competent financial advisor can evaluate all these elements and recommend how much to allocate to fixed income and how to distribute it across different products. Investing in fixed income is not a one-time activity. Investors should review their portfolio with their advisor at least every six to twelve months to assess performance and make necessary adjustments.
Gopal Gidwani is a freelance personal finance content writer with over 15 years of experience. He can be reached on LinkedIn.
Disclaimer: This story is for educational purposes only. The views and recommendations expressed are those of individual analysts or broking firms, not Mint. We advise investors to consult with certified experts before making any investment decision.
