Having decided on a specific debt category, investors may be inclined to pick up the schemes at the top of the return rankings in the last one or three years. But high returns often go hand in hand with high risks.
Today, selecting the top performers in the long-term gilt or dynamic-bond category based on their three-year performance will likely lead you to own the funds which have been most aggressive with their duration calls (i.e., owning very long-term bonds in the hope of riding the rate fall). Shortlisting the top rankers in the income, short-term income or credit-opportunities category will likely lead you to funds which are more aggressive with their credit calls (i.e., owning more lower-rated corporate bonds to earn a higher yield). For hybrid funds, high returns may be a function of the equity exposure.
But if you're a conservative investor whose main objective is to earn somewhat steady returns, you should be looking for funds with low-risk portfolios and less volatility in their returns. To ensure this, choose funds which have fared consistently well over a seven-eight-year time frame (two rate cycles). Also, check out a scheme's worst one-year return to see how badly it fares in an unfriendly market.
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