In all public forum nowadays (and even earlier) there is a tendency to blame the distributor. Let us see a typical debt market presentation:

Fund manager: Hello, today we are going to talk about debt funds

‘Debt funds have done extremely well over the past few years….’

Journalist: Why is there no retail participation?

FM: Oh! the distributor has not been selling it…

Journalist: Yes, yes, we heard that the distributor sells only funds which they like or which pays them well..

FM: yes! See the table – how well we have done…

Journalist: Sir, can I have a copy of the presentation please?

FM: of course…can we move towards drinks and dinner please?

My take: Debt funds have not done well over a 5 or 8 year period. In fact they have not done well at all. Only at times when interest rates fall, there is a good MTM which allows the returns to look good. For example income funds would have given returns of more than 6% in 2009, 2010 and 2011! This is a joke if you consider tax – even just the dividend distribution tax will take you to NEGATIVE REALĀ  RETURNS over the past few years. There is no logic at all for the retail investor to invest in debt fund – except as a small time temporary measure. It is also fine to keep money in a liquid fund so that you can do a STP into an equity fund.

The gap between a well performing debt fund (Canara Robeco I think) and a JM mutual fund is so HUGE, that it looks like a joke. SBI has such a shoddy performance in its dynamic debt fund, you will not believe it. The best fund managers are quitting the industry, the mediocre ones are s….ing your portfolio.

There is no index fund among debt funds , so the fund manager risk is too high.

The only logic in keeping money in debt funds for long periods of time is – to save the income tax. If you keep the money in say a debt fund (which gives same returns as a bank) you save the Income tax – you pay it at the end of 15 years instead of paying it every year. This saves you a lot of tax and the impact of compounding is superb. However one fund performing well over a 15 year period is like Santa Claus – a myth!

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  1. Debt funds is a very important part of the asset allocation strategy, i believe. Retail investors in India are either completely glued to equity through direct equity exposure or they are too conservative and let their real value erode by parking them in fixed deposits. If one understands the value of asset allocation he can easily follow it by investing regularly (thru sip) in a mix of debt-equity fund. But let me end it by blaming it to the distributor – do they care? sigh…

  2. Sambaran

    why this question, and how does it matter? I have ppf – but it is an insignificant part of my portfolio. In fact even though I have investment in Hdfc Prudence, my overall debt exposure, real estate, gold all put together is < 15% of net worth

  3. I asked the question because for past 2 years I am looking for an instrument through which I can achieve the debt part of my asset allocation. This blog post was slightly related to my debt-component-quest and hence the question.

  4. My Thumb rule (being formulated, not hard set):

    1. Stable Interest rate forecast => Equities
    2. Falling Interest rate forecast => GSec funds
    3. Rising Interest rate forecast => Cash (liquid/floating rate funds)
    I’ve done the last item over the last one year, moving to do item 2 this year (may even do item 1 if we see the macro economic environment stabilizing).

    Happy Investing!

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