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Debt funds deliver

Aabhas Pandya

It's a rare occurrence that promises to take debt fund managers on cloud nine. Ditto for those investors, who decided to stick to the 'insipid and dull' returns from their debt funds despite the flamboyant returns from equity funds last year. In the last five months (as on May 31, 2000), debt funds have beaten equity and balanced funds hollow.

Thus, while diversified equity funds have lost an average 20 per cent in the last five months, medium-term debt funds have gained an average 5.8 per cent during the five-month period, thereby comprehensively beating their glamorous counterparts. So, had you been an investor in a diversified equity fund, you have not only lost an average 20 per cent but also a return of 5.8 per cent from a medium-term debt fund. This takes your total loss to around 26 per cent.

The returns from long-term gilts have been even better, with an average gilt fund delivering 6.1 per cent. On the other hand, the bears have ripped off an average 22 per cent from sectoral funds. The ICE-heavy (infotech, communication and entertainment) balanced funds are a shade better, having lost 10.1 per cent during the equity meltdown.

The current calendar has been marked by intense volatility in the equity markets with the Sensex touching its all-time high on February 14 at 6150 points before it plunged to its 11-month low at 3831 points on May 23. And, so have the net asset values of equity and balanced funds. With these funds heavily loaded in favour of ICE stocks, the net asset values have taken a plunge like a bungee jumper.

On the other hand, it has been a dream run for debt and gilt funds till April this year with interest rates on a steady decline. The trigger came when excess liquidity was infused in December last year to take care of any Y2K-related problems. This clearly brought forth a low interest rate regime and when interest rates move down, fixed income securities gain. The cut in public provident fund (PPF) rate from 12 to 11 per cent in January only accentuated the fall in yields, and thereby leading to capital appreciation.

With debt funds shifting a large portion of their corpus to government securities, the gains came thick and fast. The icing on the cake came on April 1 with the cut in credit reserve ratio (CRR) and bank rate by 100 basis points. While interest rates have now come under pressure, most fund managers have weathered the fall in the debt securities by actively shifting their investments from long and medium to the short-end of the market.

While the high returns from the debt funds in the last five months look attractive and soothing to the nerves, one should not be led to believe that debt funds are a superior investment alternative. Your risk profile and the time period determine the choice of your investment avenue. Clearly, equity funds deliver far more superior returns in the long run and also hedge your investments against inflation. However, if you are looking to park your money for a short period, debt funds deserve your investment since they are not volatile like their equity counterparts.

DEBT BEATS EQUITY

Fund category	Average 5-month returns (in %)
Medium-term debt	5.80
Balanced	-10.10
Diversified equity	-19.74
Equity sectoral	-22.39

Source: Value Research

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