About 98% of debt funds gave positive returns and seven out every ten funds beat Sensex
For mutual fund investors, their date with debt in 2018 proved to be better than erratic equity. Despite pumping in thousands of crores into equity funds almost religiously every other month, retail investors will still have to wait patiently as stock market disappointed. On the other hand, good old debt funds, despite some hiccups, came out on top and provided investors with a stable return. Only 25% of equity funds provided positive lump sum return in 2018 compared to 98% of debt funds and 7 out every 10 debt funds also beat Sensex, shows a DNA Money analysis.
From the moment Long Term Capital Gains (LTCG) tax was reintroduced on equity, stock markets lost their mojo. As the sun sets on 2018, that dark shadow looms large on equity linked investment returns.
Mutual funds, which have recently grown in popularity, paint a sorry picture. Out of the 373 open-ended equity MF schemes, as many as 279 funds or 75% have given negative lumpsum returns. Out of the 94 funds that managed to show an increase in net asset value, just 32 schemes actual beat the Sensex's 5.9% return notched up between December 29, 2017, and December 30, 2018.
Many investors use the systematic investment plan (SIP) method to use the 'buy low and sell high' strategy. That strategy, which usually bores fruit in the long-term, does not particularly show very different returns than lump sum in the last one year. Like 25% of equity funds in the lumpsum format, a mere 27% of SIP investments showed positive returns in one year with SIP done on the first of every month.
The best of equity fund performers in 2018 have been schemes focussed on technology theme, and index funds/exchange traded funds (ETFs). The worst of the lot are infrastructure, small cap and mid cap funds.
The fun side has been debt, with the best performers even delivering double-digit returns. Debt funds are not very popular with individuals. Institutions hold more than 97% of debt and liquid scheme assets. So 2018 is a lesson for all individuals. In comparison to equity, debt funds have a clean sheet this year.
Out of the 305 debt funds studied, as high as 299 funds or 98% delivered a positive return in the last one year. Many may argue debt funds dabble in fixed income and giving positive return is a given. Still, getting a positive return from debt funds in a year of poor equity returns must have helped investors who use an asset-allocation strategy in combine equity and debt for their portfolio.
If you missed the fixed income bus in 2018, you can still ride it in 2019. Nitin Singh, MD & head, Standard Chartered Wealth Management, India, said, "As we head into 2019, Indian markets are likely to remain volatile. We take a balanced approach to investing being selective in taking risk (diversified equity exposure) while keeping a greater margin of safety (preference for bonds) and keeping some dry power for tactical opportunities during the year (cash a core holding)."
Given the Sensex's poor return, as much as 209 debt funds beat the Sensex. Only six debt schemes, due to IL&FS related write-down issues, posted losses as their NAV dropped less than what was one year ago.
Investors should not go overboard with debt in 2019, feel some experts. In 2019, for the first time since 2009, global central banks will tighten liquidity (Quantitative Tightening - QT) as against Quantitative Easing (QE). "This is likely to have an impact on global markets including India. Although, the Indian economy may not be impacted, but rupee, equities and bonds will get impacted on foreign flows if global markets turn negative. In the current environment of heightened uncertainties, we advise investors to have a cautious approach about interest rate and credit risk in their portfolio. It would be prudent for existing debt investors to reduce their exposure to long duration bond funds and credit funds in this current rally," said Pankaj Pathak, fund manager - fixed income, Quantum Mutual Fund.
BY A MARGIN
- Out of the 305 debt funds studied, as high as 299 funds or 98% delivered a positive return in the last one year
- Only six debt schemes, due to IL&FS related write-down issues, posted losses as their NAV dropped less than what was one year ago
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