Investors are always for Opportunities to Earn Higher Returns, Especially when Fixed Income Options LIKE FDS Offer Lower Interest. With the reserve bank of India (RBI) recently Announcing a 25 Basis Points (BPS) REPO RATE CUT in April 2025 Consider Mutual Fund Categories that Benefit from Falling Interest Rates. In this article, we’ll discus why interest rates are Falling in 2025, which mutual funds categories stand to Gain from this trend, and the best mutual funds to invest in 2025 Whhen Interest Rate are Falling. We’ll also cover the benefits and risks of investment in such funds.
Also read: 20 equity mutual funds that delivered positive returns every year in the last 10 years
Why are Interest Rates Falling in 2025?
In April 2025, The RBI Cut the Repo Rate by 25 BPS, Bringing it down to 6.00%. This followed an earlier 25 bps cut in February 2025. These back-to-back rates are in response to Easing inflation and the need to stimulate economy growth. The RBI’s policy commentary indicated that further rate cuts are possible if inflation remains under control.
Globally too, Several Central Banks Have Eather Pauses or Started Reducing Rates to Support Growth Amid Slowing Economic indicators.
Which Mutual Fund Categories Benefit from Falling Interest Rates?
When Interest Rates Fall, Bond Pries General Rise. This Inverse Relationship is particularly beneficial for mutual funds that Hold Long-Duration Debt Instruments. The following categories can outperform in short to medium term.
#1 – Long Duration Debt Funds
These funds investment in debt instruments with long maturities. They are highly sensitive to interest rate movements, Making them Ideal in a Falling Rate Environment.
#2 – GILT Funds
These funds investing in government securities with medium to long-term durations. As they carry no credit risk and are highly rate-sensitive, they tend to do well when rates fall.
#3 – Dynamic bond funds
These funds dynamically manage the Duration of their portfolio based on the interest rate outlook. They offer a balance of returns and flexibility across the interest rate cycles.
Top 10 Mutual Funds to Invest in 2025 during Falling Interest Rates
Here are some of the best-performing funds from the three categories mentioned above. These are annualized returns.
#1 – Long Duration Funds
| Scheme name | 1y | 2y | 3y | 5y | 10y |
|---|---|---|---|---|---|
| SBI Long Duration Fund | 13.4% | 10.6% | , | , | , |
| Aditya Birla Sun Life Long Duration Fund | 13.7% | 10.5% | , | , | , |
| Nippon India Nivesh Lakshya Fund | 13.0% | 10.5% | 9.6% | 7.3% | , |
| HDFC Long Duration Debt Fund | 13.5% | 10.5% | , | , | , |
#2 – GILT Funds
| Scheme name | 1y | 2y | 3y | 5y | 10y |
|---|---|---|---|---|---|
| DSP GILT Fund | 13.5% | 10.5% | 9.1% | 7.7% | 8.6% |
| SBI Magnum Gilt Fund | 12.8% | 10.0% | 9.2% | 7.6% | 8.7% |
| Icici prudential gilt fund | 11.8% | 9.8% | 9.0% | 7.7% | 8.6% |
| Tata Gilt Securities Fund | 12.2% | 9.8% | 9.0% | 6.7% | 7.6% |
#3 – Dynamic bond funds
| Scheme name | 1y | 2y | 3y | 5y | 10y |
|---|---|---|---|---|---|
| Aditya Birla Sun Life Dynamic Bond Fund | 12.4% | 9.6% | 9.4% | 8.3% | 7.2% |
| ICICI PRDENIAL ALL SEASONS BOND FUND | 11.3% | 9.5% | 8.8% | 8.1% | 8.9% |
| HDFC Dynamic Debt Fund | 11.8% | 9.5% | 8.4% | 8.0% | 7.2% |
| Uti-dynamic bond fund | 11.4% | 9.3% | 10.7% | 9.8% | 7.7% |
Benefits of Investing In these Funds during Falling Rates
- High returns: Falling Interest Rates Push Up Bond Pries, Enhancing Navs Providing High Returns.
- Diversification: These funds provide good diversification in a debt-havy or conservative portfolio.
- Professional Management: Especially in Dynamic Bonds, Fund Manners Adjust Duration to Optimize Returns.
Risks to keep in mind
- Interest Rate Reversal: If rates start rising again, these funds ungative returns, especially long duration and gilt funds. RBI Started slashing the rates recently, hence it is unlikely to have interest rate reveresal in near term.
- Volatility: Navs May Fluctate Sharply With Interest Rate Announcements. Investors Better Off Invest through sip.
- No Guaranteed Returns: These are market-linked products and returns are not fixed like fds.
Also read: 20 equity mutual funds with low beta and high alpha
Conclusion: With the RBI BEGINING Its Rate Cut Cycle in Early 2025 and Continuing it in April 2025 – And with more cuts potentially on the way – Mutual Fund Categories Like long long Duration Duration Debt Funds, GILT FUNDS, And Dynamic Bond funds are the ones that are likely to benefit. These funds have alredy shown impressive performance over the last 1-2 years and are expected to continue doing well in a declining rate Scenario.
However, investors should assess their risk appetite and investment Horizon Before Investing. Thos comfortable with some Nav Fluctations can consider these funds for better returns compared to traditional debt options.
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