By buld_online 
In a bold move to stimulate economic momentum, the Reserve Bank of India (RBI) has slashed the repo rate by 50 basis points to 5.50% and reduced the Cash Reserve Ratio (CRR) by 100 basis points. This twin easing measure is expected to release Rs 2.5 lakh crore into the banking system in phases, sending strong signals to the bond market and reshaping the debt mutual fund landscape.
This surprise rate cut, coupled with CRR easing, has given a boost to long-duration debt instruments. Debt mutual funds, particularly credit risk and gilt funds, are poised to benefit as bond yields fall and prices rise. However, the RBI’s shift to a ‘neutral’ stance signals a pause in the rate-cutting cycle, adding a layer of caution.
Rajeev Radhakrishnan, CIO – Fixed Income at SBI Mutual Fund, said the bond market reacted positively to the magnitude of the cut. “The revised inflation forecast suggests scope for a lower terminal rate. That’s already being priced in at the long end of the yield curve,” he noted.
Krishna Appala of Capitalmind PMS pointed out that rate-sensitive sectors like financials, real estate, and manufacturing could see indirect gains from lower borrowing costs, even as corporate loan demand remains subdued. He also warned that while debt mutual funds may enjoy a rally in the short term, falling interest rates could hurt traditional fixed deposit returns, making it imperative for investors to reassess their fixed income strategy.
Top-performing debt funds riding the rate cut wave
> Top 3-Month Performers
Credit risk funds have dominated recent returns, with the HSBC Credit Risk Fund – Direct Plan topping the list with a stellar 16.07% return. DSP Credit Risk Fund followed with 11.78%, reflecting improved credit spreads and a favourable rate outlook. ETFs like BHARAT Bond – April 2033 and gilt funds such as Tata Gilt Securities Fund also performed well, delivering 5%+ returns.
> Top 6-Month Performers
In the last six months, DSP Credit Risk Fund – Direct Plan surged ahead with 19.13%, closely followed by HSBC Credit Risk Fund at 18.03%. These returns underline investor confidence in lower-rated corporate bonds. Aditya Birla Sun Life Credit Risk Fund and Invesco India Credit Risk Fund also featured in the top five, with risk appetite returning amid falling inflation.
> Top 1-Year Performers
Over one year, credit risk strategies have delivered the highest returns in the debt segment. DSP Credit Risk Fund posted a robust 24.42%, while HSBC’s equivalent fund yielded 23.02%. Other strong performers included Aditya Birla Sun Life Credit Risk Fund and Bandhan Crisil IBX Gilt April 2032 Index Fund, showing how a blend of credit and duration strategies is paying off.
> Top 3-Year Performers
The three-year horizon shows consistent alpha generation by select funds. Aditya Birla Sun Life Medium Term Plan – Direct Plan led with 15.84%, followed by DSP Credit Risk Fund – Direct Plan at 15.76%. Interestingly, income plus arbitrage-oriented funds like HDFC Income Plus Arbitrage Active FoF and ICICI Prudential Income Plus Arbitrage Active FoF have also gained traction, thanks to dynamic allocation and value-based opportunities.
What should investors do now?
With the RBI hinting at a pause in further rate cuts, the rally in debt funds—particularly long-duration and credit-oriented funds—may not last forever. Investors should be mindful of duration risk and monitor shifts in inflation and liquidity outlook. For those looking to lock in yields, short to medium duration funds and high-quality accrual strategies could provide a better balance of safety and returns going forward.
The broader message is clear: while this rate cut creates a favourable environment for debt mutual funds in the near term, investors must stay agile and align their fixed income portfolio to evolving macroeconomic conditions.
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