I am really a fan of your website since my friend introduced me to it in 2006. It is really helpful for common investors in taking informed decisions. Despite my reading, I am not able to understand debt funds. I want to invest more in them. A case study can help.
I have invested Rs 1 lakh in HDFC MIP Long Term Growth. As per the watchlist information [as on 30.12.2014] the returns are
24.59% - 12 months
7.87% - 6 months
5.45% - 3 months
-0.11% - 1 month
What are the reasons for so much fluctuation? What has happened recently that returns are going negative? Please help me understand.
- Hitendra Malhotra
As per our data, the past returns of HDFC MIP Long Term are as follows:
12 months - 24.86 %
6 months - 7.67 %
3 months - 5.70%
1 month - 0.142%
This fund is not a pure debt fund. It is categorized as a Hybrid: Debt scheme which invests in a combination of equity as well as debt instruments. The fund typically has about 25 - 30 per cent of its assets in equity and the rest in debt investments.
A hybrid fund's returns depend both on the performance of the stock market and the debt market. The equity portion has delivered good returns in the last one year because of the stock market (Nifty) delivering a 43 per cent return. If the equity market falls, the returns for the equity part of the fund can go into negative territory.
As to the debt part of the portfolio, its NAV returns originate from two sources- the interest earned by bonds and g-secs held and capital gains or losses due to changes in bond prices in the secondary market. Thus, even the debt portion can at times suffer negative returns. When interest rates rise, bond prices in the market usually fall. This is because once higher yielding bonds become available in the market, there is less demand for older bonds.
You should also understand that the returns you have looked at are absolute returns for those periods. That is, they reflect the difference in the NAV between two dates. If we annualise all the returns for different periods, we would get the following returns:-
12 months - 24.86 %
6 months annualised - 15.34 %
3 months annualised - 22.8%
This reflects that the fund's returns have not really fluctuated so much from time to time.
This article was originally published on February 19, 2015.
Ask Value Research 
New episodes every Friday 
New Process Alert 
Seems like you've uploaded a wrong QR code. Please upload the QR code downloaded from MF Central platform.
