US Federal Reserve signals interest rate cuts in 2024 second half: Should you invest in debt funds?

US Federal Reserve signals interest rate cuts in 2024 second half: Should you invest in debt funds?

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

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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?US Federal

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.

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The Federal Reserve hinting at interest rate cuts in the latter half of 2024 could be an attractive time to consider debt funds, but there’s more to unpack before diving in. Here’s why debt funds might be appealing and some things to keep in mind:

Potential benefits of debt funds with falling interest rates:

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  • Locking in high yields: When interest rates drop, the value of existing bonds goes up. By investing in debt funds now, you could capture the current relatively high yields offered by these bonds.
  • Capital gains: As interest rates fall and bond prices rise, you could potentially benefit from capital appreciation when you sell your debt fund units.

Things to consider before investing in debt funds:

  • Investment horizon: Debt funds, especially longer-term ones, can be volatile if you need the money in the short term. Interest rate fluctuations can cause the value of your investment to swing. Consider your investment goals and how long you can stay invested.
  • Type of debt fund: There are different debt funds with varying maturities (duration of the underlying bonds) and credit quality (riskiness). Choose a fund that aligns with your risk tolerance and investment goals.
  • Market uncertainty: The Fed’s signals and actual rate cuts may not happen exactly as predicted. Economic conditions can change, impacting the bond market.

Here’s what you can do:

  • Talk to a financial advisor: A professional can assess your risk tolerance and financial goals and recommend suitable debt funds for your situation.
  • Do your research: Understand different debt fund types and their characteristics before investing.

Overall, a potential interest rate cut scenario can make debt funds attractive. However, careful consideration of your investment goals and risk tolerance is crucial.

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