2025 outlook: Equity’s long-term prospects remain strong, bonds may continue to offer stable, remunerative returns

The equity mutual funds segment may face continued volatility in the short term, but long-term prospects remain strong due to India’s economic growth story, favorable demographics, and government policies.

As we move toward the end of 2024, it’s a good time to reflect on the performance of key asset classes throughout the year. Equities, debt, gold, real estate, and fixed-income products like bonds and mutual funds have all exhibited diverse behaviours, reflecting both global economic trends and domestic market dynamics. For investors, understanding these movements is critical to making informed decisions in the year ahead.

A year of mixed performance across asset classes

2024 was marked by moderate growth in equities and fixed deposits, but strong performances from bonds and gold. Real estate growth showed signs of slowing down, while debt instruments provided the stability that investors sought in a volatile year.

• Equities showed slower growth in 2024 (9 percent) compared to 2023 (20 percent).
• Bonds performed better in 2024 (7.5 percent rise in short duration index) compared to 2023 (3.7 percent growth).
• Gold performed exceptionally well in 2024 (20 percent) compared to 2023 (15 percent).
• Real estate showed slower growth in 2024 (4.1 percent) compared to 2023 (5-7 percent).
• Fixed deposits remained stable but provided modest returns compared to more dynamic asset classes.

In 2024, the Indian equity market experienced a slowdown compared to the strong performance of 2023. In 2023, the Nifty 50 index rose by approximately 20 percent, driven by robust earnings, economic recovery, and optimism in retail driving small and microcap indices to all-time highs. This growth led to significant inflows into equity mutual funds, as retail investors sought long-term wealth creation. However, in 2024, the Nifty 50 showed a more modest 9 percent increase, reflecting heightened volatility due to global economic uncertainty, inflation concerns, and geopolitical tensions. Despite these challenges, India’s domestic growth prospects, especially in infrastructure, helped stabilise the market. Investors in equity mutual funds saw more returns, as the broader market continued to outperform large-cap funds.

Bonds: A safe haven amidst uncertainty

In 2024, bonds continued to offer stability in an uncertain market. Yields on government securities (G-Secs) remained steady, ranging between 6.8 percent and 7 percent, while AAA-rated corporate bonds delivered reliable returns of 7-8 percent. Despite fluctuations in interest rates, bonds proved to be a safe choice for conservative investors seeking capital preservation amid global economic volatility.

The demand for debt products surged, reflected in the 24 percent growth in Assets Under Management (AUM) of debt funds in 2024, a significant increase from the 15 percent growth in 2023. In 2023, bonds had already offered stability, with long-term government bond yields around 7-7.2 percent, benefiting from higher interest rates and a risk-averse environment. However, the 2024 performance surpassed the previous year in terms of growth, as more investors flocked to debt funds during market turbulence.

Gold: A hedge against inflation and volatility

In 2024, gold prices surged by 26 percent, reaching approximately Rs 80,000 per 10 grams. This performance underscored gold’s role as a hedge against inflation, especially amid volatility in other markets. However, the high prices led to a decline in demand, with India’s gold consumption expected to fall to its lowest in four years. While gold provided exceptional returns, the price surge resulted in reduced demand, particularly from retail investors. Despite this, gold remained a solid performer for those seeking to safeguard wealth against inflation.

Gold continued its strong performance from 2023, when prices had risen by around 15 percent as global inflation concerns and economic uncertainties pushed investors towards the yellow metal.

Real estate: slower but steady growth

In the real estate sector, sector, 2024 saw slower growth compared to 2023. The All-India House Price Index increased by 4.1 percent in Q4 of 2024, a deceleration from 4.6 percent growth in Q4 2023. The slowdown was due to higher interest rates and inflation pressures impacting the market. Despite this, real estate remained a resilient asset class, showing steady growth in 2023, with property prices in major cities growing by 5-7 percent. However, the higher borrowing costs and cautious economic outlook in 2024 are expected to keep growth subdued in the near term.

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Fixed deposits: Safe but modest returns

For FDs, 2024 marked a slight moderation in interest rates. General investor rates fell to 6.0-7.0 percent, while senior citizen rates ranged from 6.5 percent to 7.5 precent. This reduction in rates followed the Reserve Bank of India's (RBI) pause in rate hikes. While FDs continued to provide safety and stability, their real returns were affected by inflation, which remained above 5 percent throughout the year.

In 2023, FDs offered higher returns—5.5-7 percent for general investors and 6.5-7.5 percent for senior citizens—during a high-interest-rate environment. Given the stable returns in FDs, they remain an ideal solution for conservative investors seeking guaranteed returns and principal protection.

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Outlook for 2025: Mutual funds and bonds

Diversified equity and hybrid funds set to do well

As we look toward 2025, mutual funds in India are expected to continue playing a significant role in investors’ portfolios, offering a variety of options for both aggressive and conservative investors. The equity mutual funds segment may face continued volatility in the short term, but long-term prospects remain strong due to India’s economic growth story, favourable demographics, and government policies focused on infrastructure and manufacturing. Diversified equity funds along with hybrid options like Balanced Advantage and Multi-Asset Funds would be attractive options, while sector-specific funds may benefit from the evolving growth vectors like digital transformation and infrastructure.

For debt mutual funds, 2025 may see more stability, as the RBI is expected to maintain a cautious approach on interest rates. Corporate bond funds may continue to outperform government bond funds due to the relatively higher yield differential, though credit risk will remain a factor to watch. Investors looking for steady returns with moderate risk may find debt funds attractive, especially in the low-interest rate environment.

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Bond markets: Stable and secure

The bond market in India is likely to remain steady in 2025, with a focus on government bonds and high-quality corporate bonds. While interest rates might not rise significantly, bonds will remain an attractive safe haven for risk-averse investors, particularly in the face of global uncertainties. Corporate bonds offering attractive yields, particularly those from AAA-rated companies, could see sustained demand. For more adventurous investors, the bond market’s potential for capital gains in a stable interest rate environment could be an opportunity to explore.

In terms of G-Secs, yields may remain stable, but lower rates will limit any significant upside. However, as inflation expectations normalise and economic growth steadies, bonds will continue to provide a consistent and low-risk source of income for investors.

Looking ahead, investors should diversify across these asset classes, balancing risk and returns. 2025 may bring further opportunities in mutual funds, especially equity and debt funds, as well as bonds, which will remain key for capital preservation. Understanding market cycles and adjusting strategies accordingly will be essential for achieving long-term financial success.

The author is Joint Managing Director, Tailwind Financial Services.

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