With evolving macroeconomic conditions, shifting interest rate trends, and liquidity adjustments by the RBI, debt market investors are looking for clarity on where to allocate funds in 2025. In an interaction with Business Today, Murthy Nagarajan, Head-Fixed Income at Tata Asset Management, shares his outlook on debt fund strategies, the impact of recent rate cuts, and the tax advantages of debt investments over equities and fixed deposits. He also provides insights into the expected interest rate trajectory and how investors can navigate a potential 100-basis-point rate cut scenario.
Here are the key takeaways from the conversation. Q. Where should investors allocate funds within the debt market in 2025?
Investors should invest in duration products like corporate bond fund, short-term bond fund, etc., due to the expectation of another rate cut and easing liquidity conditions in the coming months. RBI MPC members have indicated their preference to support growth as CPI inflation is now in the 4 percent range. AAA Corporate bonds are giving around 60 to 100 basis points returns over similar maturity Government Securities. The YTM of corporate bonds, short-term bond fund, is similar to fixed deposit rates given by banks. Investors may aim to get the accruals of the portfolio and price appreciation due to rate cuts and easing liquidity conditions. Q. What is the impact of the recent interest rate cut on debt funds?
RBI has cut interest rates by 25 basis points but kept the stance of monetary policy as neutral. Liquidity is in deficit due to RBI intervention in the Forex Markets. RBI has infused around Rs. 4 to 4.5 Lakh crores through OMO purchases, long-term repo and forex buy sell swap to infuse liquidity. Given global uncertainty and neutral stance of RBI, the market has remained range bound even after rate cuts by RBI. Q. Which debt funds are likely to offer higher returns in a declining interest rate scenario?
Corporate bond fund may be preferred in a declining interest rates scenario. The rate cuts cycle is not expected to be steep, and we expect another rate cut by RBI along with easing liquidity conditions. In my opinion, corporate bond fund yields are expected to fall along with Government securities and investors may benefit from these accruals. Q. What tax advantages do debt funds have over equities and fixed deposits post repo rate cut and Budget 2025?
Debt funds are taxed at marginal tax rates. The benefit is to the extent of tax planning for the individual as tax is levied at the time of redemption in the fund, and no TDS is collected on a yearly basis on capital accumulation, which is not redeemed. However, TDS is levied on Dividend Income. Q. What is the interest rate outlook for 2025? We expect further rate cuts in 2025, which may take the ten-year yields in the 6.25 to 6.50 band in the current calendar year. Q. What will be the impact on long-duration funds if the repo rate declines by 100 basis points in the next 1–2 years?
For RBI to cut rates by 100 basis points, India's GDP growth must come down drastically. We don’t expect this outcome but if rates are cut by 100 basis points, the ten-year yields can go down to 6 percent levels, which may favour long duration funds.