Go for short-term debt funds in 2012

Go for short-term debt funds in 2012 as interest rates are expected to come down

The equity markets have put up a disappointing show in then year 2011. Since the beginning of the year, they have corrected by over 25% and still the direction is not clear.

The best performing short-term debt funds, and income and gilt funds, have delivered double-digit returns of over 10% and 11-12%, respectively, over the past year and are expected to do well in the coming year 2012.

Financial experts believe the equity markets will remain volatile in 2012 and debt will continue to steal the show. While debt is likely to outperform all other asset classes, it's not clear which segment will fare better: short to medium term or long term. This is because the interest rate scenario for 2012 is still unclear.

Interest rates for 2012
"The interest rate volatility is over. In fact, in two-four months, we will start witnessing the easing of monetary policy. Inflation has started cooling down and will come down further in the first half of 2012 due to the previous year's base effect. The interest rate cycle has clearly peaked. Rate reductions will be seen in the second quarter, if not earlier, for both deposits and loans." Due to the tightening of monetary policy, the lending interest rates have reached high levels and are hurting industrial growth. The recent Index of Industrial Production ( IIP) data shows a negative growth of 5.1% for October. The possibility of interest rates sustaining these levels beyond six months appears low.

The following are the top debt funds -

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