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I had invested ₹12 lakh each in two debt funds - HDFC Income Fund and Aditya Birla Income Plus one year ago. My returns till date are negative. I can wait for a year or two if the returns amount to 9 per cent a year.

Please let me know if I can get a better return from investing elsewhere. I can invest in equity funds also and I don’t have a specific horizon in mind. I do own other debt funds - Aditya Birla Treasury Optimiser, Aditya Birla Sun Life Dynamic Bond Fund and Axis Regular Saving Fund - which are giving me better returns.

I invested in income and debt funds after my FDs matured to take the benefit of indexation as I am in the 30 per cent income tax bracket.

Keshav

It is quite unlikely that the returns on the two debt funds you mention – HDFC Income Fund and Aditya Birla Income Plus - will go back to 9 per cent in the near to medium term. Given the sizeable sums you have invested in both, it may be better for you to redeem these funds and switch the money into debt funds that are better suited to current market conditions.

Before making the switch, it would be good for you to understand why the returns on your older debt funds have declined and how you should be choosing the new ones.

Income funds like the ones you have mentioned and gilt funds invest in long-term government securities and corporate bonds. They usually deliver high returns when interest rates in the economy are steadily falling, as that helps older bonds/G-secs make capital gains.

In the period from November 2013 to November 2016, interest rates in India were in a free fall, with the yield on the 10-year government security plunging from over 9 per cent to 6.2 per cent. This fall helped bond prices gain and propped up the returns on both long-term income funds and G-sec funds. In the last one year, though, market interest rates have begun to rise again, as the RBI has indicated it is in a pause. The yield on the 10-year G-sec has thus risen from 6.2 to 7.1 per cent. Any increase in market interest rates hurts the NAVs of long-term income funds as the older bonds that they own fall in value. Both HDFC Income Fund and Aditya Birla Sun Life Income Plus invest in long-term bonds and thus have seen their returns fall sharply in the last one year. From here on, it is unlikely that interest rates will continue to fall. Therefore, this is the wrong time to invest or stay invested in income funds that own long-term bonds.

To improve your returns, you can either move into hybrid products like equity savings schemes (they invest 65 per cent in equity and arbitrage options and 35 per cent in bonds, or into what are called accrual funds). But given that you clearly aren’t comfortable with a negative return, switching into equity savings schemes or even high-risk debt funds isn’t a good option for your profile. With equity markets at elevated levels, equity savings funds can carry the risk of low returns.

The best fit for your portfolio at this point would be income funds that maintain a somewhat short maturity, and earn higher interest (accrual) without going overboard on risky corporate bonds.

You could instead invest in DSP BR Banking & PSU Debt Fund, HDFC Banking & PSU Debt Fund or UTI Banking & PSU Debt Fund. You should however reset your return expectations to 7 per cent or so.

Send your queries to mf@thehindu.co.in

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