Here's what the underlying portfolio of various categories look like now
Short Term Debt Funds - Mod duration in the range of 1.5 - 2.5 years and a YTM (yield to maturity) of 7.2% post expense ratio. Effectively if interest rates stay where they are, you are likely to make an annual return of between 7 - 7.8% here on before taxation.
Duration Funds - exposure to longer dated securities, Mod duration in the range of 5-8 years and a YTM of around 7%. If interest rates go down by 25 bps, you are likely to make YTM + (change in interest rate) * mod duration. These funds are most sensitive to interest changes (or expectations of interest rate changes), hence over the past 1 year these funds had the highest return. Some funds gave return in excess of 15%, however when the expectations of interest rate cuts reverse, these funds will see most drop in NAV
Credit funds - These invest in shorter term papers with a mod duration of 1 - 2.5 years but hold sub AAA papers predominantly. Hence the YTM is way higher and in the range of 8.7 - 10.5% currently depending on where the max exposure is, logically lower the credit quality higher will be the YTM.
Given that banks are sitting on a lot of money which they will eventually need to deploy into lending business, my call is that the sub AA category of corporates is where banks will need to lend. Larger corporates with healthy cash position won't really borrow unless the rate is very attractive. For the banker to make a healthy ROE on his loans, he needs to look at a healthy spread over his cost of funds, this spread can come only if the corporate isn't highly rated. Also post demonetization, organized players are gaining business at the expense of unorganized guys. If banks want to expand their asset base, they will need to look at sub AA rated corporates since they will be most hungry for working capital and term loans.
Also higher the YTM of the fund, lower is the interest rate sensitivity since a higher YTM cushions any mark to market losses due to adverse interest rate swings. I do not think interest rate hikes are materializing any time soon, I also think the current bond market reaction is overdone. However at a gross YTM of 10% I see better chances of making a healthy return in credit oriented funds than in duration funds. I will restrict the exposure to 30% of my fixed income portfolio though