As equity mutual funds' returns turn negative, debt outperforms

Debt mutual fund returns have outpaced those at several small-, mid- and large-cap equity funds in the past one year.

Gains of 13% in the Sensex have not benefited equity fund investors, for whom returns in traditional debt funds investing in government bonds may have been higher.


Long-duration debt funds and Gilt funds yielded 8.25% and 7.93% in the past one year, showed data on Value Research, which tracks the mutual fund industry.

Gsec funds have outperformed due to Open Market Operations (OMO) and rate cuts.

The Reserve Bank of India (RBI) purchased a record ₹2.98 lakh crore worth of bonds from the market through a mechanism known as OMO, which the central bank uses to manage liquidity.

“RBI has managed interest rates through proper inflation management and that has resulted in falling rates,” said Anil Chopra, group director, Bajaj Capital. “The low interest rate regime is expected to continue amid softer consumer prices.”

Since August, RBI reduced the repo, or the rate at which banks borrow short-term money from the central bank, by 50 basis points collectively in two separate policy actions. The repo is now at 6%.

A basis point is one hundredth of a percentage point.

“The surge in the Sensex has not been broad based and just about a third of the index stocks rose,” said Chopra. “Diversified funds have allocation across sectors, which in turn ….erased overall returns.”

About 10-12 scrips led the Sensex rally. These included select private banks, IT stocks such as TCS, Wipro and HCL Tech, Reliance Industries and Tata Motors.

“Overall, the equity market is subdued,” said Vikram Dalal, managing director, Synergee Capital Services. “Capital goods, pharma and PSU stocks have not participated.”

Mid-cap funds have generated negative returns in excess of 8%. The extent of losses is greater when it comes to small-cap funds, which lost about 14%. “Due to the recent issues with NBFCs and credit risk funds, investors were seeking safety in central government securities,” Dalal said.

Performance Report

Fund category	1-year return (%)
Equity: Mid cap	-8.20
Equity: Small cap	-14.50
Equity: Large & mid cap	-1.98
Debt: Gilt	7.93
Debt: Long duration	8.25
Debt: corporate bond	6.75

Source: Value Research