Debt fund outlook: Choice of fund class must match horizon, risk appetite

Fund managers foresee two more rate cuts of 25 bps each in the coming policies

The Reserve Bank of India (RBI) cut the repo rate by 25 basis points (bps) to 6 per cent on April 9, its second consecutive reduction following the 25-bps cut on February 7. It also shifted its monetary policy stance from “neutral” to “accommodative”.  

Outlook on interest rates 

Fund managers foresee two more rate cuts of 25 bps each. “There will be a cumulative rate cut of 100 bps in this cycle, resulting in a terminal repo rate of 5.5 per cent over the next three to six months,” says Mahendra Kumar Jajoo, chief investment officer (CIO) – fixed income, Mirae Asset Investment Managers (India). 

Sneha Pandey, fund manager – fixed income, Quantum Asset Management Company (AMC), expects the next cut in June 2025. “A rate cut in the August 2025 policy will depend on the evolving growth-inflation dynamics,” she says. 

The 10-year benchmark yield has already declined by nearly 60 bps over the past year—from a peak of 7.10–7.15 per cent to around 6.45 per cent. “With an additional 25–50 bps in rate cuts, the 10-year benchmark yield could trade in the range of 6.25–6.40 per cent levels in the first half of this financial year,” says Devang Shah, head – fixed income, Axis Mutual Fund. Jajoo expects the 10-year government security (G-Sec) yield to approach 6 per cent. 

Long-duration funds 

With yields set to fall further, long-duration remain appealing after the policy announcement. “This trade has some way to go,” says Jajoo.  

Shah advises caution. “The interest-rate cut cycle is likely to be shallow. Once the 20–25 bps rally has happened and government bond yields touch 6.25 per cent, investors should look at alternatives,” he says. 

 

Medium, low-duration funds  

With the RBI infusing ₹7.5 lakh crore in liquidity—and possibly more in the future—the short- to medium-term corporate bond market is expected to benefit. “This huge liquidity surplus augurs well for the medium-term corporate bond space,” says Shah.

Short-duration funds also remain well-placed. “Money market rates have been falling. Short-duration funds have given good returns in the past year. This trend is likely to continue. They are also giving good yields at present,” says Jajoo.  

Shah recommends low-duration funds for short-term investments. Pandey suggests liquid funds for investors with a low risk appetite and shorter horizons.  

Dynamic bond funds  

Dynamic bond funds are suited for this environment of heightened macroeconomic uncertainty. “Dynamic bond funds are well suited for long-term investors in this period of market volatility. These funds actively adjust to interest-rate movements, strategically shifting between short- and long-term bonds while balancing risk through a mix of government and corporate securities,” says Pandey.  

Shah also favours the income-advantage category, which typically allocates 65 per cent to debt and 35 per cent to arbitrage. 

Building a resilient portfolio 

Shah recommends increasing exposure to debt, given the risk to growth and the likelihood of further rate cuts. Jajoo advises matching fund categories with one’s requirements. “Match your risk profile and investment horizon with a fund category of appropriate duration,” he says. 

Pandey highlights the need for careful fund selection. “Prioritise high credit quality funds having a mix of government securities and AAA-rated instruments to ensure capital preservation and steady returns,” she says.