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Shanthi Venkataraman

INVESTORS in debt funds may bemoan their lacklustre performance in recent months, but they can take comfort from the fact that diversified debt funds largely outperformed the Crisil Composite Bond Index.

Of the 82 debt funds analysed by Business Line, 69 beat the index. But with average returns of 0.6 per cent from debt funds for the quarter, one need hardly celebrate.

Debt funds, over the past year, responded to hardening long-term yields by packing their portfolios with more short-term instruments and fixed-income options such as fixed deposits. They also invested a significant proportion of their assets in money-market instruments.

The average maturity profile of the top-performing debt funds is one to three years. Top-performing funds, therefore, turned in better returns — for instance, SBI Magnum Income Income Plus, which recorded 3.5 per cent. But barring the top few funds, returns ranged between a negative 0.5 per cent to a positive 2 per cent.

With expense ratios eroding NAVs (net asset values), institutional plans of funds scored over retail plans, as they come with lower costs of servicing. For instance, the institutional plan of Deutsche Premier Bond fund generated a return of 1.08 per cent, while the retail plan recorded 0.82 per cent.

Float to the top: Floating rate funds, on an average, delivered better returns. In fact, quite a few floating rate funds outperformed diversified debt funds. For instance, DSP ML Floating Rate Fund generated a return of 1.23 per cent, whereas its bond fund turned in just 0.09 per cent.

Gilt funds go dull: Gilt funds, being more sensitive to interest rate hikes, had a dismal performance during the quarter. On an average, the returns have been 0.23 per cent, with many funds turning in negative returns.

Top-performing funds, such as Reliance Gilt Securities Fund and Chola Gilt Fund, turned in stronger returns of more than 2 per cent. These funds invested a greater portion of their assets in money market instruments, to enhance their returns.

Better returns from MIPs: Investors in monthly income plans (MIPs) could enjoy superior returns this quarter. On an average, MIPs generated a return of about 2.5 per cent, far ahead of plain debt funds and gilt funds.

With investments in equity at 18-20 per cent, and significant investments in the money market, these funds perked up returns significantly. But they were also hit hard by a downturn in the market.

Balanced funds record modest returns

With debt funds looking unattractive, cautious investors would probably find balanced funds more attractive.

Balanced funds yielded an average return of 8 per cent, in line with the returns generated by CRISIL Balanced Fund Index.

In fact, had you invested in the top ten performing balanced funds, you would have earned 14-20 per cent — returns not matched by even some of the good diversified equity funds, such as Franklin India Bluechip.

These funds were more aggressive, stepping up investments in equity. In almost all top-performing funds, equity accounted for more than 50 per cent of the total assets, while a significant amount was invested in the money market.

Still, investing independently in debt and equity funds rather than in balanced funds has proved a better alternative.

A few balanced funds, such as HDFC Prudence and Tata Balanced Fund, delivered superior returns vis-à-vis the direct investment style. But this does not apply to all funds. For instance, had you invested 60 per cent in Sundaram Income Plus and 40 per cent in Sundaram Growth Fund, you would have earned a higher return on your investment.

A fund of funds or asset allocation fund has, therefore, been touted as a superior option as it invests in funds rather than equity or debt securities. The aggressive plans of these fund of funds — particularly those that invest a greater proportion in equity funds — turned in a strong performance over the quarter.

The aggressive plans of PruICICI Advisor Series and Birla Asset Allocation Fund put them among the top performers.

At the same time, these plans may be limited by the need to invest in funds belonging to their own fund house.

For instance, FT India Life Stage Fund of Funds 20s Plan underperformed its peers, despite its greater emphasis on equity funds. This is because it invested about 50 per cent of its assets in Franklin India Bluechip, which was an underperformer during the quarter.

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