Compared with a net inflow of Rs 1.42 lakh crore in November 2018, mutual funds registered a net outflow of Rs 1.36 lakh crore in December 2018. While the equity asset base continues to be robust, it is the debt mutual funds that saw heavy redemption. However, industry experts are attributing such outflows to the end of quarter effect and advance tax outflows as the reasons for the huge outflows from liquid and money market funds. Debt mutual fund investors were largely left disappointed in 2018 as returns dipped due to rising bond yields and were also hit by credit downgrades. Controlled inflation and any RBI repo rate cut in the near future may send a strong signal which may also require a change in the strategy for debt fund investors in 2019. Why debt funds' performance dwindled? When interest rates tend to move up, the NAV and hence the return of a debt fund falls. Effectively, in a rising rate scenario, the bond prices fall, thus pushing the yield up, which has a negative impact on the fund's NAV. In such a scenario, the long dated bonds and securities are more sensitive than shorter duration funds. Therefore, in 2018, the rising interest rate scenario had its impact on the performance of debt funds. For financial goals that are about three years away, investing in debt funds help in generating tax-effective returns. Choosing the right kind of a debt fund is important as along with the credit profile, the maturity profile of the underlying securities of the debt fund will largely determine the performance of the fund. Here is how they debt funds across various duration have fared. Debt fund returns Over the last one year, the debt funds with medium-to-long duration generated an annualised return of around 5 per cent; for the medium duration debt funds the return has been about 5.5 per cent per annum. The returns for the short duration debt funds has been around 6.5 percent. The returns for the low duration and ultra-short duration debt funds has been around 7.25 per cent and 7.65 per cent, respectively. The liquid funds have generated a return of around 7.5 per cent over the last one year. How the yield moved The G-sec yield is almost back to where it was 12 months back. According to Bloomberg, on Jan 9, 2018, the yield was 7.37 per cent, while today on Jan 8, 2018, the yield is close to 7.53 per cent. It touched a low of 7.13 per cent and a high of 8.18 per cent over the last 12 months. The year gone by saw a lot of volatility and uncertainties in the bond market, especially in the backdrop of oil prices and rupee-dollar exchange rates. Is there an alternative? As an alternative, bank fixed deposits (FD) are currently offering returns of around 7.5 per cent per annum. However, the interest earned is entirely taxable in the hands of the investor as per one's income slab. Bank FD suits ultra conservative investors who are primarily looking for preservation of capital. What to do now Post re-categorisation of MF schemes, there are about 16 categories of debt funds. Going forward, until a clear picture emerges as to where the rates are headed, the debt fund investors should stick to low-duration funds and liquid funds with good credit risk profile. Conservative investors should avoid Corporate Debt funds, Dynamic funds and even the Credit Opportunities fund. Debt funds are market-linked investments and if the interest rate cycle reverses and shows a declining trend, the debt fund investor will reap its benefit.