Low-risk bonds are becoming more appealing to investors as funds that focus on the equity market suffered the biggest loss since 2008 due to the poor performance of the Chinese stock market.

The domestic A-share market has posted one of the worst performances of major global equity markets with the Shanghai Composite Index (SCI) falling 26 percent this year.

The weak market condition has resulted in a loss of more than 500 billion yuan for China's mutual fund industry in the first half of the year, according to data from Wind Info. The net asset value (NAV) of the country's open-end stock funds dropped by 21.6 percent on average while the NAV of index funds declined by 26.7 percent.

Analysts said that relatively low-risk bond and money-market funds, which are the only funds that reported positive gains in NAV in the first six months this year, are safer investment choices as investors are seeking refuge from the turmoil in the equity market.

"The less-risky fixed-income funds are safer investment options now," said Chen Guiliu, an analyst at Dongguan Securities. "We recommend investors adopting a defensive strategy by allocating capital in such funds to avoid potential risks in the volatile stock market."

But Chen also warned investors of the possibility of an interest rate hike in the second half of the year that could have a negative impact on the returns of bond funds.

Index funds that mirror a market index such as CSI 300 -- which tracks 300 large-cap stocks traded in Shanghai and Shenzhen- also reported significant loss in net asset value.

But analysts said that funds that track the indexes of big-cap stocks still hold the value of long-term investment whereas funds that focus on small-cap indexes face the possibility of further decline.

"Passively-managed index funds usually don't have much of an advantage in a weak market, but they are still a good long-term investment choice as large-cap stocks with low valuations are poised to rise in the future," said Wu Fei, an analyst at Soochow Securities.

In the meantime, more Chinese investment funds ventured into overseas stock markets which seem to be less volatile and have a better prospect than the home market.

Domestic funds that invest in foreign markets through the program of Qualified Domestic Institutional Investors outperformed the home market although they reported a 2.09 percent decline in net asset value.

Foreign stock markets had a better performance than the domestic market in the first two quarters but downward risks may emerge as investors fear that the fragile global economic recovery might backtrack in the second half of the year, analysts said.

(China Daily July 5, 2010)