Betting On Debt

Small investors are pouring money into debt funds. Are they investing wisely

The equity market is reeling under the impact of innumerable meltdowns and scams. So, where should the small investor put his money? It is hardly surprising that debt funds have caught the imagination of investors in recent months.

How much money has gone into debt funds? There has been a stupendous net inflow (sales minus redemptions) of Rs 12,861 crore between April-July 2001. On the other hand, both balanced and equity schemes witnessed a net outflow of Rs 4,267 crore and Rs 311 crore respectively.

However, it is not just the languishing equity market that has prompted investors to put their money in debt funds. The returns provided by funds invested in medium- and long-term debt securities have been spectacular (between 14 and 24 per cent) over the past year.

For instance, over a one-year period ended July 2001, Templeton IGSF (a gilt fund) has given returns of 23.27 per cent. Similarly, K Gilt Serial 2007 (a serial plan) has provided a return of 20.94 per cent while PNB Debt (an income fund) has been a leader in its category with returns of 20 per cent during the period. By comparison, equity funds (with the sole exception of UTI Petro) have provided negative returns during the period.

But let us understand how debt funds work?

There are primarily two levels of comparison. First, there are three maturity levels