Equity-fund investors are always warned not to pick the chart-topping funds for their performance over short periods such as one year because these are big risk-takers. The same lesson now applies to debt-fund investors as well.
Many of the long-term gilt and dynamic bond funds, which ruled the return charts in 2016, are also the funds to have suffered sharp setbacks in 2017. Funds which took on less duration risk and consistently maintained lower portfolio maturity looked bad during boom times, but have fared better in bad times.
In choosing a debt fund, look for consistency in its calendar-year returns and its ability to beat its benchmark over both rising and falling rate cycles. Ignore trailing returns, as they are highly influenced by the start and end points over which you are measuring performance.
In final analysis, using a rolling-return analysis over two rate cycles (about eight years) for debt funds can be a good way to zero in on the schemes (both credit and duration) with the best risk-reward profiles. Available on www.valueresearchonline.com, the calendar-year returns versus benchmark/category and data on best and worst show over a month, quarter and year are an excellent guide to home in on funds with the best long-term records.
Why your debt fund is losing money and what you should do
Caught on wrong foot
Spooked by the deficit
Debt funds: What to do now
Take measured credit risks
Stretch your holding period