After a sharp drop in nominal returns from debt funds, investors are now faced with the spectre of a big squeeze in their real rate of return with inflation expected to be around 5 per cent in the current financial year.
Fund managers said real rate of return could be as low as 2-3 per cent with medium-term debt funds likely to give 7-8 per cent this year.
The real rate of return is arrived at by subtracting the rate of inflation from the nominal return on investment. The Reserve Bank of India Governor Bimal Jalan had recently said that point-to-point headline inflation was expected to be around 5.0-5.5 per cent at the end of the current financial year.
Falling returns: In the last financial year (2002-03), medium-term debt funds had given an average return of 11-11.5 per cent.
With inflation hovering in the range of 3-3.5 per cent for the previous financial year, the real rate of return for investors in bond funds was in the region of 8 per cent.
