The income funds of mutual funds have seen a substantial outflow over the past one-year owing to uneven performance forced by a volatile debt market.

At the end of July 2005, assets managed under 45 income schemes totalled Rs 4174 crore (Rs 41.74 billion), down 72 per cent from what they were a year ago. In July 2004, the corpus of debt funds stood at nearly Rs 15,000 crore (Rs 150 billion).

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The HDFC [Get Quote] Income plan has seen the corpus of its income fund declining from Rs 1671 crore (Rs 16.71 billion) to Rs 446 crore (Rs 4.46 billion); the Standard Chartered mutual fund has had an outflow of Rs 1843 crore (Rs 18.43 billion) in two of its schemes, the Grindlays Dynamic Bond Fund and the Super Saver Income Fund; the Prudential ICICI [Get Quote] Income Fund has lost Rs 943 crore (Rs 9.43 billion) with its corpus declining from Rs 1286 crore (Rs 12.86 billion) to Rs 343 crore (Rs 3.43 billion); and the LIC [Get Quote] Bond Fund is down from Rs 1150 crore (Rs 11.5 billion) to Rs 240 crore (Rs 2.4 billion).

Though income funds gave an average return of 5.21 per cent over the past one year, the uncertainties in the interest rate scenario prevented investors from opting for debt funds, fund marketers said.

Income funds, which invest in medium-to-long-term corporate debt and government securities, have been in rough weather for well over a year due to rising bond yields.

Over the past one year, the yield on the 10-year benchmark government security has risen from 6.12 per cent to over 7 per cent, dragging down bond prices.

Lower bond prices are bad for debt funds as they erode the value of underlying portfolios of debt funds. Besides, uncertain debt markets also diminish the possibility of trading profits as fund managers run the risk of getting caught on the wrong foot.

"Uncertain bond markets have made fund investors wary of investing in bond funds.

However, this money has not moved out of the fund industry" said Sameer Kamdar, national head, Mata Securities, a fund distributor.

Debt fund investors have taken shelter under short-term debt funds, liquid funds and floaters, which are relatively immune to interest rate movements.