Which debt funds beat most equity funds in 5 year period

Though fixed income and stocks have two very different goals in one’s portfolio, in some phases debt funds will outshine equity funds

Kumar Shankar Roy Jul 2, 2020

Mutual funds dataDebt mutual funds are mostly used for capital preservation, with an added return that is higher and more tax-efficient than traditional alternatives. On the other hand, equity funds are mostly used for growth purposes, given their much higher potential to deliver returns. But given the current situation, equity funds at an average today look poor when compared to debt funds on a reasonable time-period i.e. 5-year term. In fact, there is not 1 equity fund category that has beaten the best performing debt fund category. The poorest debt fund category i.e. credit risk with a 5-year CAGR of 3.8% has outdone as many as 7 equity fund categories. You can very well understand the deep chasm between debt fund returns and equity fund returns. These trends reiterate the need to have exposure to both debt and equity in your investment portfolio. Read on.

Return matrix

If you map the 5-year returns of all debt funds and all equity funds, you will be able to look at over 580 funds (320 equity schemes and 262 debt schemes).

On a category head to head among best equity funds and best debt funds, you will see IT/tech sectoral funds with 8.83% CAGR category gains being dwarfed by 10.7% category gain notched up by Gilt with 10-year Constant Duration funds. Even, the plain-vanilla gilt funds with a category average of 9.2% also beat the best-performing IT equity funds. Long duration schemes also have given better returns at 9.96% CAGR in the five-year period.

Since equity funds on a category level have delivered 3-5% CAGR in this 5 year period ended June 30, 2020, most of the debt fund categories have easily given better returns. This becomes clear when we see the second-worst performing debt fund category return of 5.76% CAGR, which has been delivered by probably the safest schemes: overnight funds.

Given that the debt funds deliver high levels of tax efficiency (due to indexation benefit) when held over 3 years while there is 10% long term capital gains tax in case of equity fund gains above Rs 1 lakh, there is a camp which thinks the post-tax adjusted gains delivered by debt funds would be even higher.

Top debt funds

Debt funds have admittedly been in the eye of fire post the Franklin Templeton negative event. But 1-2 events do not at a whole level mar its reputation. Over 60 debt schemes have delivered between 7% CAGR to 8% CAGR in these 5 years. As many as 96 debt schemes over the 5 year period have delivered over 8% CAGR. About 10 debt funds have delivered over 10% CAGR.

The best ones of course fall in the two gilt spaces. The list is led by IDFC Government Securities Fund – Constant Maturity Plan (11.42%), ICICI Prudential Constant Maturity Gilt Fund (11.01%), SBI Magnum Constant Maturity Fund (10.71%), Nippon India Gilt Securities Fund (10.63%), Aditya Birla Sun Life Government Securities Fund (10.41%), SBI Magnum Gilt Fund (10.21%) and ICICI Prudential Gilt Fund (10.15%).

A note of caution for investors wanting to chase performance. The outflow of money from credit risk funds has come as inflows into gilt funds. This was not just due to the higher returns but also due to their perceived safety. Since gilt funds invest in bonds of the central government and state governments, these funds carry little or no credit risk. Yet credit risk isn’t the only risk you should be worried about. Gilt funds, in general, maintain a higher modified duration and that has contributed to the spectacular performance in recent months when interest rates were falling. Unless interest rates continue to fall, this performance of gilt funds will not sustain. Also, gilt funds are known to witness higher daily volatility.

Best performing debt funds

Debt Fund Name 5 Year Return (CAGR %)
IDFC Government Securities Fund – Constant Maturity Plan 11.42
ICICI Prudential Constant Maturity Gilt Fund 11.01
SBI Magnum Constant Maturity Fund 10.71
Nippon India Gilt Securities Fund 10.63
Nippon India Gilt Securities PF 10.63
Aditya Birla Sun Life Government Securities Fund 10.41
IDFC Government Securities Fund – Investment Plan 10.41
SBI Magnum Gilt Fund 10.21
ICICI Prudential Gilt Fund 10.15
UTI Gilt Fund 9.99

Best performing equity funds

Fund Name 5 Year Return (CAGR %)
Motilal Oswal NASDAQ 100 Exchange Traded Fund 21.39
Franklin India Feeder Franklin US Opportunities Fund 15.46
DSP World Gold Fund 14.87
ICICI Prudential US Bluechip Equity Fund 13.03
Edelweiss Greater China Equity Off-shore Fund 12.55
Mirae Asset Emerging Bluechip Fund 11.53
DSP US Flexible Equity Fund 10.79
Aditya Birla Sun Life Digital India Fund 10.44
Parag Parikh Long Term Equity Fund 9.94
SBI Small Cap Fund 9.78

5-year returns ended June 30, 2020. All data for regular plans

Foreign factor

While category average returns show that IT/tech sectoral funds were the best performer, at the individual fund level, it was international funds that took the cake in case of equity schemes.

The best-performing schemes Motilal Oswal NASDAQ 100 Exchange Traded Fund (21.39% CAGR), Franklin India Feeder Franklin US Opportunities Fund (15.46%), DSP World Gold Fund (14.87%), ICICI Prudential US Bluechip Equity Fund (13.03%), Edelweiss Greater China Equity Off-shore Fund (12.55%) show that the best equity fund returns did not come from India. There was a foreign hand.

The only 2 domestic-oriented equity funds that have delivered more than 10% CAGR in the 5 year period are Mirae Asset Emerging Bluechip Fund (11.53%) and Aditya Birla Sun Life Digital India Fund (10.44%).

With the average equity fund return in the 5 year period being 4.27%, this has been a challenging phase. The average debt fund return at the same time is 7.22%. Its debt all the way.

In terms of negative returns, 23 equity schemes figure in this list. This list is dominated by infrastructure funds, PSU funds, banking funds and smallcap funds. The laggards are led by Kotak PSU Bank ETF (-15.27% CAGR), Nippon India ETF PSU Bank BeES (-15.22% CAGR), HDFC Infrastructure Fund (-7.84% CAGR), HSBC Infrastructure Equity Fund (-7.34% CAGR) and CPSE Exchange Traded Fund (-6.74% CAGR).

In comparison, there are only 4 debt funds that clocked negative returns of 5 years and they are BOI AXA Credit Risk Fund (-18.32% CAGR), Baroda Treasury Advantage Fund (-6.65% CAGR), UTI Credit Risk Fund (-1% CAGR). These are all from the same category – credit risk funds.


Kumar Shankar Roy

Kumar Shankar Roy is contributing editor with RupeeIQ. Kumar is a financial journalist, with a functional experience of 15 years. He tracks mutual funds, insurance, pension, PMS, fixed income/debt and alternative investments markets closely. He has worked for The Times of India, The Hindu Business Line, Deccan Chronicle Group, DNA, and Value Research, among others, across different cities in India. He is deeply interested in marrying data insights with actionable opinion. He can be contacted at kumarsroy@rupeeiq.com.

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