Kolkata: India is firmly on an interest rate downcycle. While Reserve Bank of India has cut Repo Rate in successive Monetary Policy Committee, the rate-cutting body, meetings have slashed the key policy rate by 25 basis points on each occasion, a SBI Research report has estimated that there will be a total of 125 basis points cut in Repo Rate this year.
This pivot has put the focus back on debt funds. In the debt fund stable, long and medium-duration debt funds could hog the limelight. Anand K Rathi, co-founder, MIRA Money tells News9live.com readers about the interest rate downcycle and why it puts the spotlight back on debt mutual funds.
Interest rate dip leads to this…
We all know that interest rates and the price of bonds are inversely related. “”When interest rates fall, previously issued bonds (with higher yields) gain value. This leads to capital appreciation for investors holding those instruments. For example, the 10-year government bond yield had touched ~7.4-7.5% last year. Since then, with signs of easing inflation and two 25 bps rate cuts from the new RBI governor, yields have now dropped to the 6.3-6.4% range. Investors who locked in at the earlier, higher rates are now sitting on capital gains as bond prices rise,” said Rathi.
In a sense, he echoes the SBI Research report. “We believe this downcycle has more room to run, potentially another 75 basis points of easing, given the benign inflation outlook. That makes now a strong entry point into duration-oriented debt funds,” he added.
Tax-related setback
However, Rathi is also quick to point out that debt mutual funds have been subjected to a tax-related setback, when last year, the government removed the indexation benefits. “While this did impact their relative appeal to ultra-conservative investors, the case is once again strengthening, especially as equity markets reach new highs and fixed deposit returns struggle to keep pace with inflation,” he remarked. In fact, all banks have started slashing rates they pay on fixed deposits of various tenures.
“In order to lock in yields while preserving liquidity, conservative and retired investors are reallocating to dynamic bond funds and gilt funds. In the face of high market values, HNIs are now considering duration funds as a diversification tool. In terms of risk-return, while equity remains the growth engine, debt offers stability, visibility, and a hedge against volatility-something investors value highly in 2025’s global economic uncertainty,” he summed up.
(Disclaimer: This article is only meant to provide information. News9 does not recommend buying or selling shares or subscriptions of any IPO, Mutual Funds, precious metals, commodity, any form of alternative investment instruments and crypto assets.)
If you are ready to explore beyond the sizzle of equities and look for stable, quiet performance in the interest rate downcycle, India’s falling rate environment. For investors who want predictable returns debt funds can be an appropriate instrument. Anand K Rathi, co-founder, MIRA Money explains why. Personal Finance Business News – Personal Finance News, Share Market News, BSE/NSE News, Stock Exchange News Today
