Monthly income funds seem to be the best bet for investors in the current scenario as they are generating higher returns compared with income and gilt funds.

According to analysts at HDFC Bank, the rationale behind the trend is that returns generated by income and gilt funds are much lower now than they have been over the past few years.

Among debt funds, short-term funds are better compared to the other maturities as the interest rate risk in these schemes is much lower.

According to industry analysts, short-term funds are recommended with an investment horizon of at least three to six months "as the funds have got an average maturity profile of more than 12-15 months."

An overview of debt-oriented funds for September shows that most of the income and gilt funds generated above-average returns.

Most of the income funds increased their maturity profile on expectations of a rate cut in the forthcoming credit policy.

The funds had, in fact, increased their maturity profile after the yields had firmed up after the repo rate cut.

However, income funds continue to have a higher exposure towards government securities as corporate spreads continue to widen.

Within the gilts spectrum, the funds have positioned themselves in the 10-15 year range as they are betting positively on the interest rates at the current levels.

Among equity-oriented funds, most of the diversified schemes have outperformed the benchmark indices.

In fact, according to HDFC Bank analysts, diversified equity funds have generated returns of 30-65 per cent in the last three-six months, while the BSE Sensex has appreciated by 34-29 per cent for similar time frames.

The survey also found that most fund managers have been taking advantage of the attractive valuations in the market and are now fully invested.

This is also due to the fact that most fund managers are bullish on the market over the next three-six months.

Funds have spread their investments over a wide range since the rally has been fairly broad-based. The funds are overweight on sectors such as banking, oil and gas, automobiles and metals.

During the last few months, some of the funds have increased their exposure to technology stocks on expectations that these companies will report good results for the first half of the year.

On a wider scale, the top five stocks constitute 25-35 per cent of the portfolio invested in stocks such as Grasim, State Bank of India, Tata Steel and Infosys Technologies.

However, some of the more conservative funds have decided to hedge their risks and diversify across a wider range of stocks.

Balanced funds have also become aggressive in the current rally and have invested 60-65 per cent of their portfolio in equities with the remaining being in debt instruments.