Debt funds grab spotlight on back of fall in equities

For mutual funds, the returns spectrum has witnessed a complete reversal of roles in the last one month.

Debt has come to the fore, much of it scoring in terms of capital preservation and more, while all classes of equity funds have gone down the tube, the worst affected losing over 15 per cent during the period.

The last one month, marked by a serious retraction of valuations on the equities front, has come as a bonus of sorts for investors who have dabbled in certain categories of debt products, especially funds in the short-term genre.

The difference in returns becomes more conspicuous when the best- and worst-performing categories are compared. These, as one estimate has determined, are roughly 0.6 per cent and minus 17 per cent respectively.

The trend, seen in the context of declining equity prices, may well sustain for some more time and even gather strength, sources said.

They added that this will turn the lay investor's attention even more firmly towards debt funds.

The latter are already in the limelight, thanks to recent developments in the debt market.

Equity fund managers mostly agree that a large section of investors, typically with low appetite for risks, may generally prefer conservative options for the time being.

"While some may see this as the time to get into good stocks commanding attractive valuations, some others may want to wait till it all settles down. This happens whenever there is such uncertainty," said Mr Mihir Vora of HSBC MF.

Not surprisingly, equity funds that have lost money in the past month include sectoral products.

Auto and banking sector funds were the worst hit, each losing over 15 per cent.

FMCG and pharma funds were a shade better, at minus 11 per cent and minus 12 per cent respectively.

Diversified funds, which do not have the luxury of investing in just a few sectors, have averaged a negative 14 per cent.

Shorter-term debt products, specifically liquid funds, have found a mention in the recent Budget, which has increased the dividend distribution tax for these funds to 28.3 per cent (including surcharge and cess at 10 per cent and three per cent respectively).

Liquid funds have been in the news ever since, a situation triggered by claims that these products will lose their attraction when compared to bank deposits which offer higher rates.

The sources, however, said that it is not liquid funds that are commanding all the attention from intelligent investors. Instead, fixed maturity plans (FMPs), which have come up in a big way in recent times, are emerging as a big draw.

This category is expected to continue to hold sway in the days ahead.

Mr Vikaas Sachdeva of ING Vysya MF said that FMPs will be able to firmly sustain their position even as fund houses seek to attract "smart money" through that route. "We see enough scope in rolling out attractive products, including those aiming at relatively higher yields, on the FMP front."