Short answer: Yes, but…
In the first post of this blog, a couple of months ago, I mentioned three categories of investors for whom there was a compelling case to consider investing in mutual funds. Yesterday’s Budget proposals for a change in taxation of gains from debt funds don’t negate the points I made in that post. However, for investors with a proposed investment tenure of less than 3 years, the case to consider a debt fund is now considerably weakened.
Some time ago, I undertook a study that covered the period 2007-2013, over which I compared the returns from debt funds with a cumulative term deposit with State Bank of India. I looked at the calendar year returns and at the rolling 2 year (calendar year) returns. The fund data was taken from Value Research. No exit loads were applied. The data covered 370 debt funds, of which 153 were in existence in 2007 (and for which data was available for each year since). Here are some findings:
1 year returns:
The best calendar year in terms of the number of funds outperforming the deposit was 2008, when 81% of the funds did so. The worst year was 2009 when 6% of the funds did so.
Of the 153 funds in existence since 2007, no fund beat the return from the deposit in all 7 calendar years. 3 funds outperformed the deposit in 6 of the 7 years, while another 27 did so in 5 of the 7 years. There were 58 funds which outperformed the deposit in 2 years or less (including 6 funds which did not surpass the returns from the deposit in any single calendar year.)
2 year returns:
The best two-year period in terms of number of funds outperforming the deposit was 2011-12, when 78% of the funds did so. The worst two-year period was 2009-10 when 1% of the funds beat the returns from the deposit.
No fund surpassed the returns from the deposit over all 6 two-year periods. 2 funds outperformed the deposit in 5 of the 6 two-year periods while 18 funds did so in 4 of the 6 two-year periods. The vast majority of the funds outperformed the deposit half the time or less. 14 funds did not beat the returns from the deposit in any two-year period.
There was no pattern that I could see across these numbers linking funds having a similar average maturity or credit quality or strategy. Looking at these numbers, I am inclined to believe that without the advantage of tax breaks, investing in a debt fund, hoping to beat the returns from a 1 year deposit or a 2 year deposit is quite like a shot in the dark. I am also inclined to believe that for someone in the higher tax brackets, there is a case to consider allocating more to equity funds. After all, the return required to outperform a deposit or a debt fund just went down. But maybe that’s a discussion best left for another time. For now, consider it as food for thought.
