Investors who had parked their savings in debt funds will want to forget 2004. It was a year in which volatile interest rates wreaked havoc on debt funds.
The average depreciation in capital was around 7 per cent but that was compensated to a large extent by the increase in coupons.
Thus, most investors did not lose too much - one-year returns on income funds have been zero. As the year draws to a close, bonds have rallied smartly and the benchmark 10-year gilt is quoting at a yield of 6.5 per cent. Not so long back, it had hit a high of 7.3 per cent in intra-day trades.
Fund managers now feel the worst may be over and the risks of investing in debt schemes are reduced. Inflation and oil prices could once again play spoilsport as could higher yields in the US debt market and a strong reversal of foreign portfolio flows.
However, with inflation seemingly under control and adequate liquidity in the system, it appears to be a good time to step into the debt markets.
Around Rs 55,000 crore has been sucked out of the system by the central bank through market stabilisation bonds; if inflation comes down further, the central bank could allow some liquidity back into the system.
Corpuses with fund managers have shrunk to about one-eighth the amount they had at the start of the year. And the average maturity of portfolios is now down to between two and three years compared with five years or over in April.
Thus, they are in a far better position today to alter their portfolios in response to any movements in interest rate and the impact would be much smaller.
To be on the safe side, investors should perhaps park 50 per cent of their investible surpluses in liquid schemes and floaters especially those looking at a shorter time-frame of less than six months. Earlier these schemes were giving returns of between 4 per cent and 4.5 per cent.
Now, these are offering around 5 per cent, with interest rates on corporate paper having been re-set upwards by about 50-75 basis points. Corpuses of floaters schemes are parked in floating rate corporate paper so that the interest rate risk is minimised.
The remaining amount could be invested in long-term income schemes and long-term gilt schemes.
Says, K Ramanathan, fund manager Birla Sun Life AMC, "From a six-month perspective its a good time to enter these schemes, since inflation could come down."
According to Dhawal Dalal, head-fixed income, DSP Merrill Lynch, there could be a good opportunity in these schemes as the risks in the debt market have reduced.
Adds Sandesh Kirkire, CIO-debt, Kotak AMC, "With the 10-year gilt at 6.5 per cent , the movement in terms of yields should be very small and if the investor stays invested for over a year, even if he loses on the capital, the income from coupon will compensate. Investors could hope to earn a return of between 5.5 per cent and 6 per cent from these schemes."
In fact, Ramanathan recommends even short-term bond funds, where the tenor is just over a year. "These are a good option, even for three to six months and should give good returns " he says, explaining that quality corporate paper is now available at a coupon of 6.5 per cent.
Kirkire too feels that that short-term bonds pose a reasonably low risk since the scheme is held to maturity. With things taking a turn for the better, those investors who put money early in 2004 but did not cash out would do well to hold on. And those who want a return better than that on fixed deposits could try their luck in long-term income and gilt schemes.Powered by 
More from rediff