Debt fund returns will be volatile

I want to start a SIP (Systematic Investment Plan) in a good debt fund which has given more than 10 per cent returns in the past one year. Please suggest.

-Ayan Dutta

For the year ending August 13, as many as 29 of the 48 medium-term debt funds have given returns of more than 10 per cent. There is an inverse relationship between interest rates and bond prices; debt funds gain when the interest rates are falling and vice versa. The high returns of debt funds in the past one year are mainly because of the continuously falling interest rates towards the end of 2008.

There are lesser chances now that rates will see a similar fall in the coming future. Moreover, with the government borrowing to finance its rising expenditures, bond prices are more likely to see a fall. Debt funds are going to be volatile in the coming times and one should not expect them to deliver such returns.

Some top rated funds that have delivered returns of more than 10 per cent in the past one year are Canara Robeco Income, ICICI Prudential Income, Fortis Flexi Debt Regular, IDFC Dynamic Bond Plan A, Sahara Income and Birla Sun Life Dynamic Bond Retail.

I have recently redeemed my investments in Canara Robeco Income Fund. While the exit load quoted on their website at the time of redemption was 0.5 per cent, they charged me 1 per cent. The same load percentage was quoted on AMFI's website and ICICIDirect.com. Is this not cheating the investors?

-Narendra Parmar

Redemptions from a fund are subject to the exit load applicable at the time of investing and not the prevailing exit load. The fund had been charging an exit load of 1 per cent between January 5 and May 12, 2009. If you had invested during this period, a 1 per cent exit load will apply.

The benchmark of the DSPBR Equity Fund is S&P CNX Nifty. Why, then, has it been classified as a mid-cap fund on Value Research?

-Vinayak Nadgauda

An equity fund chooses the benchmark which it believes will most closely resemble its investment style and returns. It helps investors compare the scheme's performance with that of the benchmark index and justify the additional risk taken.

At Value Research, we classify funds into various capitalisation ranges based on their portfolio, which in turn decides its market cap. The largest 10 per cent of funds by their market cap are classified as large-cap, the next 20 per cent as mid-cap and the remaining 70 per cent as small-cap.

So, while a fund invests in all large-cap companies, its relative market cap in its peer group will determine how it will be classified.

I have invested in HDFC Capital Builder through an SIP since June 2006, for around two and a half years. When a new manager took over in 2007, it did seem to be doing well for a little while. But should I now swap my units from HDFC Capital Builder to HDFC Equity?

-Shaanto

For HDFC Capital Builder Fund, more than the fund manager pushing up the returns, it was the market rally that helped the fund gain in 2007. Its returns in 2009 have been 58.77 per cent, ranked 88th among 213 funds, compared to the category average of 56.80 per cent. In 2008, its fall was similar to the category average and was ranked 99th among 193 funds. The returns of this fund do not put it in the top ranks. You may consider other top rated large-cap funds such as Birla Sun Life Frontline Equity, DSPBR Equity, DWS Alpha Equity, HDFC Top 200 and Magnum Contra.

Value Research