Mumbai: With interest rates falling and economic signals aligning just right, long-duration mutual funds are looking like the smart, strategic play. One of the golden rules of fixed income is simple: when interest rates fall, bond prices rise. But here is the nuance—longer-duration bonds benefit more from this trend than shorter ones.
The Reserve Bank of India (RBI) has cut the repo rate by 50 basis points this year, bringing it down to 6%, and more importantly, shifted its stance from ‘neutral’ to ‘accommodative.’ With inflation softening and global growth concerns lingering, the market is anticipating up to 50 basis points of further rate cuts in 2025. If you are holding long-duration funds, you are positioned to benefit.
Most long-duration mutual funds are packed with government securities and high-grade corporate debt which become more valuable as rates fall. It is because older bonds offering higher interest are more attractive when new ones yield less. That means potential for capital gains, not just regular interest income.
Let us take a home loan to illustrate. A Rs 50 lakh loan at 9% means an EMI of Rs 44,986. Cut the rate to 8.5% and the EMI drops to Rs 43,391. That is a saving of Rs 1,595 a month—or about Rs 3.8 lakh over 20 years. Now apply the same idea to your investments: when you enter long-duration funds while rates are high and ride them down, you set yourself up for strong long-term returns. The earlier you enter, the better your compounding potential.
Bonds offer predictable returns
Let us be honest—equity markets can be thrilling, but they are also unpredictable. Long-duration funds, on the other hand, tend to offer more consistent returns over a 3-5-year horizon. With the RBI expected to stay on a dovish path, now is a rare window to lock into high-quality debt instruments before yields fall further.
The central bank’s message is loud and clear: it is prioritising growth while keeping inflation in check. With softening global trade and subdued merchandise exports, domestic demand needs a boost—and lower rates are the chosen tool. This makes long-term debt instruments an attractive option for investors who want to stay aligned with policy signals.
Final thoughts
Long-duration mutual funds are not always the stars of the show. They require patience and a bit of foresight. But right now, the macroeconomic setup is about as good as it gets — rate cuts, stable inflation, and a central bank that is leaning toward growth. If you have been waiting on the sidelines with cash, hoping for the next big equity opportunity, it might be worth looking at the bond corner of the market. While equities are still figuring things out, long-duration debt funds are already in play. This could be the time to make your move.
