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I am a millennial centric (and now maybe Gen Z too) content creator who simplifies the world of personal finance, so that your hard earned money doesn’t end up hardly working for you. After working in this field for over 7 years, my priority remains the same-to make personal finance less boring and more jargon free through my unbiased and well-researched content!
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Imagine you are an absolute equity lover. Stocks are your thrill ride, while debt funds are just a sleepy side note in your portfolio.
But what if I told you there were years when those ‘boring’ debt funds left the stock market in the dust? And not just once or twice, but multiple times!
Buckle up as we time-travel through 2011, 2015, and 2022- the epic plot twists where debt funds stole the show while equities took the back seat.
2011 was a year in which India saw two unwanted double-digit figures. One in the form of a 10% inflation rate, and the other in the form of a 25% drop in the equity market. But amidst all this, debt funds turned out to be the real winners.
Let us deep dive to help you understand how it all happened:
On one hand, the government was stuck in policy paralysis amid the 2G scam's impact on the telecom sector's regulatory framework and public trust. On the other hand, the coal scam had led to an estimated financial loss of around ₹10.6 lakh crore to the government.
Moreover, the RBI had hiked the repo rate multiple times from 6.5% to 8.5% to fight the 9%-10% inflation that year. This move adversely impacted company profits, as they had to pay more interest on corporate loans, thus making the cost of capital expensive and hitting industrial and overall economic growth.
Amidst all this, the equity market plunged, with Nifty 50 suffering a 25% drop in 2011’s calendar year.
Let’s look at the data.
| Debt funds | |
| Name of fund | 1 Year Return |
| HDFC Dynamic Debt Fund - Growth Option | 6.5% |
| Edelweiss Liquid Fund - Retail Plan - Growth Option | 7.9% |
| Quantum Liquid Fund - Direct Plan Growth Option | 8.6% |
| ICICI Prudential All Seasons Bond Fund - Growth | 8.8% |
| Equity | |
| Nifty 50 | -25% |
(Returns taken from 1st January 2011 to 31st December 2011)
(Data sources: https://www.nseindia.com/reports-indices-historical-index-data https://www.amfiindia.com/net-asset-value/nav-history)
So, how did debt funds become the unsung hero?
While the RBI hiked repo rates multiple times, it also injected liquidity via open market operations (OMO) and CRR cuts late in the year.
This meant that the RBI pumped money into the financial system by buying bonds directly through OMO, and also cut the CRR (Cash Reserve Ratio) so that banks had to keep less cash with the RBI, thus freeing up more money to lend. This boosted bond sentiment.
With the equity market bleeding, investors preferred to park money in safer instruments like debt funds for stability.
With more demand for debt funds, fund managers decided to buy more bonds with fresh inflows. This pushed bond prices up via demand-supply dynamics, increasing capital gains and NAVs of debt funds.
So, you see, multiple reasons worked in favour of debt funds and against the equity market in 2011. The numbers have also been there to prove.
Next, let's hop onto another year that saw debt funds beating equities.
After 2011, let’s fast-forward to 2015. 2015 proved that 2011 was not an outlier case. There were multiple instances wherein the 1 year returns of debt funds comfortably beat those of equities. Let's focus on 2015 for now and understand what all had happened:
China's sharp devaluation of its currency, the yuan renminbi (CNY), on August 11 surprised the world.
While the move was claimed as reforms for a market-oriented economy, it actually sparked worldwide repercussions, including a ‘Black Monday’ on August 24 when Sensex and Nifty 50 crashed 6% in a single day, and US indices like S&P 500 and Dow Jones dropped 5%-6%.
Amid fears of the US Fed's first rate hike in a decade, FII net outflows from Indian equities hit around $2.5 billion, while collapsing global commodity prices hurt metal, oil & gas, and cyclical stocks.
Domestically, RBI Governor Raghuram Rajan introduced the Asset Quality Review (AQR), forcing banks to recognize NPAs instead of hiding bad loans, causing huge reported losses in banking stocks. Nifty 50 ended the year with a 5% drop.
And yet again, debt funds came out as winners.
The data in the table below clearly shows how debt funds were once again able to outperform equities, this time in the year 2015
| Debt funds | |
| Name of fund | 1 Year Return |
| ICICI Prudential All Seasons Bond Fund - Growth | 5.9% |
| Quantum Liquid Fund - Direct Plan Growth Option | 7.8% |
| Edelweiss Liquid Fund - Retail Plan - Growth Option | 7.7% |
| HDFC Dynamic Debt Fund - Growth Option | 5.6% |
| Equity | |
| Nifty 50 | -5% |
(Returns taken from 1st January 2015 to 31st December 2015)
Here’s why they stole the show:
RBI cut the repo rate by a total of 125 basis points between January and September (from 8% to 6.75%), making existing higher-coupon bonds more valuable than newly issued lower-yield ones, rallying bond prices, and boosting debt fund NAVs as they invest primarily in fixed-income instruments.
With the stock market in negative, China's devaluation, and commodity price crashes, risk-averse investors turned to less volatile bonds and debt funds. This influx, coupled with rate cuts, quietly drove the outperformance of debt funds over equities that year.
Now let's focus on a very recent instance wherein debt funds turned out to be the winners against equities. It happened just three years ago, in 2022!
After 2011 and 2015, 2022 was another year when debt funds outperformed equities. But this time, the equity market wasn’t bleeding in red, but had stayed rather flat. Let us deep dive to understand what happened in 2022:
Firstly, the RBI had aggressively hiked repo rates by 2.25% in just 8 months (May to December 2022) to fight post-Covid inflation. This increased the borrowing costs for companies and hurt profits, keeping Nifty and Sensex flat.
Secondly, the FII exodus repeated 2015's pattern as the US Fed hiked rates too, thus making US Government Bonds attractive and pulling foreign money from emerging markets like India.
Also, amid US recession fears, the Nifty IT index crashed around 25%, dragging diversified equity funds; small-caps cooled off after 2020-2021 rallies. The Russia-Ukraine war broke out in February, spiking oil and commodity prices. With India being a heavy oil importer, inflation rose amidst all this.
Amid global uncertainty, the equity market remained volatile, and the Nifty 50 ended the year with just 2.7% upside.
And again, debt funds turned out to be the outperformers.
Although 2022 did not see debt funds significantly beat the equity market (unlike 2011 and 2015), but they still managed to edge past it.
| Debt funds | |
| Name of fund | 1 Year Return |
| ICICI Prudential Liquid Fund - Direct Plan - Growth | 4.8% |
| Invesco India Liquid Fund - Direct Plan - Growth | 4.8% |
| Nippon India Ultra Short Duration Fund- Growth Option | 4.5% |
| Invesco India Corporate Bond Fund - Direct Plan - Growth | 3.2% |
| Equity | |
| Nifty 50 | 2.7% |
(Returns taken from 1st January 2022 to 31st December 2022)
Here’s what gave them a boost:
As interest rates rose in 2022, amid multiple repo rate hikes by the RBI, debt fund managers immediately reinvested the maturing bonds, T-bills, etc into new ones that were offering higher rates.
Domestic debt funds, driven by local corporate demand and banking liquidity, proved insulated against global FII selloffs and maintained steady returns, unlike equities.
From 2011's crash, 2015's China panic, to 2022's rate-hike storm, we brought to you multiple instances which prove that ‘boring’ debt funds do hold the potential to outperform the mighty stock market.
Yes, in the long run, say 4-5 years or 10 years, equities continue to beat debt, but for the short term, for goals like a foreign vacation corpus, purchasing a vehicle, or even parking your emergency fund, debt funds are an apt choice.
So, the point we are trying to put across is that diversification is a key tool that can give your portfolio that edge. While equities keep doing their work in the long run, debt funds can be the ‘calm amidst the chaos’, especially when all you can see is the color red in your equity portfolio!
Please note that this is an opinion blog and not an official research or investment advice. The blog neither encourages nor discourages you from investing in any particular asset class or platform.
If you would like to learn more about the world of investments, you can join the ALT Investor community here. We have various industry experts and fellow investors as part of our community who can help you with your queries and provide useful insights!
