Investors are always on the lookout 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 (following an earlier cut in February 2025) and signaling a dovish stance for the future, it’s time to consider mutual fund categories that benefit from falling interest rates. In this article, we’ll discuss why interest rates are falling in 2025, which mutual fund categories stand to gain from this trend, and the Best Mutual Funds to invest in 2025 when interest rate are falling. We’ll also cover the benefits and risks of investing 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 rate cuts are in response to easing inflation and the need to stimulate economic growth. The RBI’s policy commentary indicated that further rate cuts are possible if inflation remains under control.
Globally too, several central banks have either paused 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 prices generally 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 invest 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 invest 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 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 annualised 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 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% |
Benefits of Investing in These Funds During Falling Rates
- High Returns: Falling interest rates push up bond prices, enhancing NAVs providing high returns.
- Diversification: These funds provide good diversification in a debt-heavy or conservative portfolio.
- Professional Management: Especially in dynamic bond funds, fund managers adjust duration to optimize returns.
Risks to Keep in Mind
- Interest Rate Reversal: If rates start rising again, these funds could see negative returns, especially long duration and gilt funds. RBI started slashing the rates recently, hence it is unlikely to have interest rate reversal in near term.
- Volatility: NAVs may fluctuate 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 beginning 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 duration debt funds, gilt funds, and dynamic bond funds are the ones that are likely to benefit. These funds have already 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. Those comfortable with some NAV fluctuations can consider these funds for better returns compared to traditional debt options.
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