There's no need to panic

It has been a forgettable year for managers of debt funds at Indian fund houses, with their equity peers having stolen the show.

But with stock markets pausing for a breather in the midst of what experts say is a sure (well, almost) bull run, you may be wary of putting more money into equities. Till markets stabilise, then, you may want to consider debt funds.

"In the last three weeks, there has definitely been pick up in our debt and largely-debt schemes," says K Ramkumar, head of Fixed Income products at SBI Mutual Funds.

"And since the movement is more in subscriber numbers than in the quantity of funds mobilised," he adds, "I assume that it is largely small investors who're looking at respite from equity."

Now, debt schemes from mutual funds come in three broad categories. One: fixed-maturity schemes with lock-in periods and tax advantages.

Two: liquid funds which are easy to get in and out of, but whose returns are governed by short-term interest rates in the economy. And three: income funds, which use up to 20 per cent of their assets to generate returns from the equity market.

"In terms of returns, the best would be funds which have a small but flexible exposure to equities, but also have a lock-in period, even if it is very short, like six months," says Mahhendra Jajoo, head of fixed income at ABN Amro Asset Management.

"The fund manager can reduce the equity component in such schemes to zero if there is too much volatility, but can bring it back up to 20 per cent if things pick up again. This gives him the ability to not only beat normal debt schemes, but also prevent back-sliding as he does not have to remain invested in equities at all cost," he points out.

But if you want no such lock-in, advises Ramkumar, "Go for liquid schemes which invest in daily paper, weekly paper etcetera, but only give returns of around 6 per cent. In such schemes, there are no entry or exit charges, but still give returns comparable to short-term fixed deposits in banks."

And finally, there are the pure-debt fixed-maturity schemes. With lock-in periods as low as two months, these offer insulation from equity fluctuations.

"This is basically a very low-risk option, but these are able to give better returns than liquid schemes thanks to the lock-in which enables the fund manager to plan investments for the long term. Since his investment world is not confined to low-yield, very short-term debt instruments, one can expect returns of about half a per cent higher than liquid schemes. Of course, if the lock-in is for longer, the gains can be higher," Jajoo points out.

Debt funds may be worth a try. But don't expect the bumper returns experienced some years ago during the interest-rate tumble post-2001; that was driven by a boom in bond prices, perhaps to aberrative levels. For big gains, let equities bounce back.

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