Investors are always looking for opportunities to earn higher returns, especially when bond options like FDs offer lower interest. With the Reserve Bank of India (RBI) recently announced a 25 basis points (BPS) reporate cut in April 2025 (following previous cuts in February 2025), signaling an incredible stance for the future, it is time to consider the category of mutual funds that will benefit from falling interest rates. This article explains why interest rates will fall in 2025. This explains the categories of mutual funds you will get from this trend, as well as the best mutual funds to invest in 2025 when interest rates are falling. It also covers the benefits and risks of investments in such funds.
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Why are interest rates falling in 2025?
In April 2025, RBI reduced its reporate by 25 bps, down to 6.00%. This was followed the initial 25 bps reduction in February 2025. These consecutive rate reductions address the need to ease inflation and stimulate economic growth. RBI policy commentary showed that further interest rate reductions are possible when inflation is controlled.
Globally, several central banks have begun pauses or cuts to support growth amid slowing economic indicators.
Which mutual fund categories benefit from falling interest rates?
When interest rates drop, bond prices generally rise. This inverse relationship is particularly beneficial for mutual funds that hold long-term debt certificates. The following categories can be outperformed in the short to medium term.
#1 – Long-term debt fund
These funds are invested in debt instruments with long maturities. They are very sensitive to interest rate movements, and they are ideal in a downward environment.
#2 – Gold leaf funds
These funds are invested in government securities over medium to long term periods. They do not carry credit risk and are very rate sensitive, so they tend to work when the rate drops.
#3 – Dynamic Bond Fund
These funds dynamically manage the portfolio duration based on interest rate outlook. They provide revenue balance and flexibility throughout the interest rate cycle.
Top 10 mutual funds to invest in 2025 are falling in interest rates
Below are some of the best performing funds from the three categories above. These are annual revenue.
#1 – Long-term funding
| Scheme name | 1Y | 2y | 3y | 5y | 10 years |
|---|---|---|---|---|---|
| SBI Long Hurture Fund | 13.4% | 10.6% | – | – | – |
| Aditya Birla Sun life long Duration Fund | 13.7% | 10.5% | – | – | – |
| Nippon India Nivessh Lakshya Fund | 13.0% | 10.5% | 9.6% | 7.3% | – |
| HDFC Long-Term Debt Fund | 13.5% | 10.5% | – | – | – |
#2 – Gold leaf funds
| Scheme name | 1Y | 2y | 3y | 5y | 10 years |
|---|---|---|---|---|---|
| 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 Fund
| Scheme name | 1Y | 2y | 3y | 5y | 10 years |
|---|---|---|---|---|---|
| Aditya Birla Sun Life Dynamic Bond Fund | 12.4% | 9.6% | 9.4% | 8.3% | 7.2% |
| ICICI Prudential 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% |
The advantage of investing in these funds is during falling fees
- High return: A fall in interest rates will boost bond prices, boost NAV, and bring about high returns.
- Diversification: These funds provide good diversification in debt-heavy or conservative portfolios.
- Professional management: Especially in dynamic bond funds, fund managers adjust periods to optimize returns.
Risks to keep in mind
- Interest rate reversal: If the rate starts to rise again, these funds can see negative returns, especially long-term and gold leaf funds. RBI has recently begun cutting rates, so it is unlikely that interest rates will reverse in the short term.
- Volatility: NAV may fluctuate rapidly with interest rate announcement. Investors are better off investing through SIP.
- There are no guaranteed returns: These are market-related products, and returns are not fixed like FDS.
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Conclusion: RBI began its rate reduction cycle in early 2025, and continues in April 2025, potentially reducing. This is what is likely to benefit from mutual fund categories such as long-term debt funds, guilt funds, and dynamic bond funds. These funds have already performed impressively over the past year or two, and are expected to do well in a decline-rate scenario.
However, investors should assess risk appetite and investment duration before investing. Those who are satisfied with some NAV fluctuations can consider these funds for better revenue compared to traditional debt options.
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