New Delhi: Following Reserve Bank of India’s decision to cut repo rate twice in February and in April 2025, several banks have reduced interest rates on Fixed Deposits (FDs). However, this has come as a boon for some mutual funds. Experts are of the view that better returns can be expected from debt mutual funds in such a scenario.
Debt mutual funds are funds that invest in bonds that pay a fixed interest (called coupon) for a fixed period of time. Notably, when interest rates are slashed, newly issued bonds are available at a lower interest rate. Thus, the value of old bonds that are paying higher interest increases and their prices start increasing. Since mutual funds possess these old bonds, the increase in their price increases the NAV (net asset value) of the fund and ultimately benefits the investors.
However investors should know that every bond doesn’t react in the same way. Bonds with longer maturities react more sharply to interest rate changes, Jitendra Solanki, a SEBI registered investment advisor, told Money9live:
The expert stated that when interest rates decline, prices of long-term bonds rise and long-term funds give higher returns. When interest rates rise, these funds can suffer huge losses, he said.
Solanki went on to say that short-term funds are more stable and make less profit when rates fall, but these protect you from making big losses when rates rise.
Debt fund units can be sold by investors at any point in time. Debt fund invests in different debt instruments like, debt securities of governments, banks and companies both in the private and public sector.
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Following recent repo rate cuts, debt mutual funds are experiencing increased investor interest. Lower interest rates boost the value of existing bonds held by these funds, leading to higher NAVs and potential returns for investors. Markets Business News – Personal Finance News, Share Market News, BSE/NSE News, Stock Exchange News Today
