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Business News/ Mutual Funds / US Federal Reserve signals interest rate cuts in 2024 second half: Should you invest in debt funds?
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US Federal Reserve signals interest rate cuts in 2024 second half: Should you invest in debt funds?

The US Fed has indicated it will cut interest rates in the latter half of 2024. It is an opportunity for investors to invest in debt funds and lock into current high yields and potential for future capital gains.

US Federal Reserve expected to cut interest rates in the second half of 2024.Premium
US Federal Reserve expected to cut interest rates in the second half of 2024.

On 20th March, the US Federal Reserve, in its FOMC meeting, indicated that it would start cutting interest rates in the second half of this year. The RBI is also expected to follow the US Fed by cutting interest rates. Let us understand whether this is a good time to invest in debt funds.

Interest rates and bond prices have an inverse relationship. So, when interest rates go down this year, the bond prices are expected to rally. It will lead to capital gains for investors holding these bonds.

Also read: Mutual fund investing: 7 debt funds delivered maximum returns in the past ten years

What is the US Fed expected to do?

In March, the US Fed Chairman Powell said in the post FOMC meeting news conference: "We believe that our policy rate is likely at its peak for this type of cycle, and that if the economy evolves broadly as expected, it will likely be appropriate to begin dialling back policy restraint at some point this year". So, the Chairman indicated that interest rate cuts are expected this year, depending on the economic data.

The Fed dot plot projects 75 basis points (expected to be three interest rate cuts of 25 basis points each) interest rate cut in 2024. Similarly, interest rates are expected to be cut by 75 basis points in 2025 as well as in 2026.

How can you benefit from the fall in US interest rates?

You can benefit from the fall in US interest rates by investing in mutual funds that further invest in US bonds. In India, as of March 2024, two AMCs offer an opportunity to invest in US Treasury Bonds. Bandhan Mutual Fund offers one scheme, and Aditya Birla Sun Life Mutual Fund offers two schemes.

1) Aditya Birla Sun Life US Treasury 3-10 Year Bond ETF FOF: The scheme invests in the units of ETFs that invest in US Treasury Bonds with a maturity between 3 to 10 years. The scheme is appropriate for investors who want to invest in US Treasury Bonds with a higher tenure. The higher the bond tenure, the higher the sensitivity towards the movement in interest rates. The scheme gives an opportunity to lock into the current high yields and the potential to make capital gains when interest rates move down.

2) Aditya Birla Sun Life US Treasury 1-3 Year Bond ETF FOF: The scheme invests in the units of ETFs that invest in US Treasury Bonds with a maturity between 1 to 3 years. The short tenure allows you to reduce the volatility and duration risk. The scheme gives you an opportunity to lock into the current yields.

3) Bandhan US Treasury Bond 0-1 Year FOF: The scheme invests in the units of ETFs that invest in US Treasury securities with a shorter maturity of up to one year. It is suitable for investors who want to enjoy the current high yields and avoid the duration risk.

Also Read: Mutual Funds: These 10 funds investing in overseas ETFs gave over 30 percent return in the past one year

Why should you invest in US debt securities?

The benefits of investing in US debt securities include the following.

1) Current high yields and potential for capital gains: As of March 2024, the US 10-year bond yields are in the 4.2% to 4.5% range. In November 2023, the 10-year yield had crossed 5% briefly. These are multi-year or decadal high yields. It is a good opportunity for investors to lock into the current high yields.

The US Fed has indicated it will cut interest rates in the second half of 2024. Whenever that happens, the bond prices will rally. It will lead to capital gains for existing investors. Hence, the US bonds are providing an opportunity to lock into the current high yields and potential capital gains in future.

2) Geographical diversification: Investing in US securities provides an opportunity to diversify your investment portfolio geographically. Asset allocation requires an investor to diversify their portfolio across various asset classes such as equities, fixed income, gold, etc. The US securities are a different asset class and provide further diversification. The US is the world's largest economy, and the US Government Bonds enjoy one of the highest credit ratings. The US Government bonds provide one of the highest security and liquidity.

3) Benefit from currency depreciation: Historically, the Indian Rupee (INR) has depreciated against the US Dollar (USD). When the INR depreciates against the USD, you will benefit as an investor in USD-denominated US assets. Over the last decade, the INR has depreciated on an average of 2-3% annually. If the INR depreciation continues in future, it will add to your returns. However, if the INR appreciates against the USD, it will eat into your returns.

Investing in Indian Gilt Funds

In the second half of 2024, the RBI is also expected to cut interest rates. To benefit from the cut in interest rates in the domestic market, you can invest in Gilt Funds. In India, several AMCs offer Gilt Funds. These funds invest a minimum of 80% of their total corpus in G-secs issued by the Indian Government.

Government securities offer one of the highest liquidity and safety. Also, with domestic Gilt Funds, there will be no fluctuations in returns due to currency movements.

Also Read: Mutual funds: What are gilt funds? Is this a good time to invest in them?

Debt funds: Opportunity to lock into current high yields and future capital gains

The yields on Government securities across many countries, including the US and India, are at multi-year highs. In the second half of 2024, many central banks across the globe, including the US Fed and RBI, are expected to cut interest rates. Hence, it is an opportunity for investors to invest in debt funds and get the dual benefits of locking into current high yields and future capital gains when interest rates move down.

Gopal Gidwani is a freelance personal finance content writer with 15+ years of experience. He can be reached at LinkedIn.

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Published: 12 Apr 2024, 09:34 AM IST
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