Debt funds: Is the worst over?

Oct 25-26Y-T-Oct 25Y-T-Oct 26 Gilt med/long term-0.44-0.96-1.38 Debt med/long term-0.220.08-0.15 Gilt short term-0.031.661.62 Debt short term-0.033.033.00 Debt ultra short term0.013.513.52 Debt floating rate0.013.653.66 Source: Valueresearchonline.com

 Gilts funds fared even worse. The category lost 0.44 per cent on the same day. Short-term debt and gilt funds were also hit, albeit marginally (0.03 per cent). Not just that, dynamic bond funds, which are free to keep their asset allocation flexible between cash and bonds, depending on the market mood, also lost in value as many fund managers were caught on the wrong foot.  Cash/liquid funds and floating rate funds (FRFs), however, remained relatively stable. Debt funds continued to slip for the rest of the week as the sentiment remained weak. For the first time in the history of debt funds, the returns are in negative territory for a full year.   

Shades of red
	Returns in % as on Oct 29, 2004
	1 week	1 month	3 months	6 months	1  year
Gilt medium/long term	-0.42	-0.89	-0.22	-3.25	-1.27
Debt medium/long term	-0.18	-0.29	0.22	-1.51	0.42
Debt medium term (institutional)	-0.17	-0.38	0.34	-1.64	0.33
Debt speciality	-0.17	-0.46	-0.06	-1.96	0.26
Gilt short term	0.01	0.12	0.55	0.43	2.45
Hybrid monthly income	0.02	0.21	2.10	0.18	5.44
Hybrid debt	0.03	0.21	4.35	0.47	10.61
Debt short term (institutional)	0.04	0.11	0.88	1.51	4.20
Debt short term	0.04	0.01	0.78	1.51	3.91
Debt ultra short term	0.08	0.35	1.07	2.11	4.31
Debt ultra short term (institutional)	0.09	0.38	1.15	2.27	4.62
Debt floating-rate funds	0.10	0.37	1.13	2.23	4.59
Hybrid equity	0.53	1.71	9.15	1.90	24.3
Source: Valueresearchonline.com

 Why the pessimism?
For the current fiscal, the RBI increased its inflationary forecast from 5 per cent to 6.5 per cent while reducing the GDP growth forecast from 6.5-7 per cent to 6-6.5 per cent, citing deficient monsoon and uncertain oil prices.  Besides, the policy stance was changed from