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Dynamic Bond Funds

What is your view about investing in dynamic bond funds, as here investors need not worry about the duration of the bond?

Yes, that is the claim of dynamic bond funds. Some funds have been able to do it successfully. But the real problem is associated with the kind of flexibility they have in terms of their interest-rate views. Their calls can well go wrong and we have witnessed it in the last 10 years that, too, during some critical occasions. This is because most of the big moves even in the fixed-income market have come as a surprise, resulting in losses for investors.
So, theoretically, a dynamic bond fund should have emerged as an investment option wherein investors will invest money and the fund manager will take care of it. But in reality, many of the fund managers have not been able to prove their credentials in a full-market cycle. So, I would say that be wary of that.

In my opinion, you have far greater control over the time frame that you have for your fixed-income investment. The downside risk with a fixed-income fund is lower. Further, since you are investing in a fixed-income fund, it shows that you are risk-averse and looking for predictable returns. But these funds may not be a desirable investment option for you, given the scale of volatility involved and the price that you have to pay if the fund manager goes wrong (which has quite often been proven in the last 10 years).

Depending on your investment time frame, you could choose a liquid fund/short-term fund or a high-quality corporate bond fund. Don’t move anywhere beyond high-quality. Given the kind of outlook that we are seeing right now, many other fund categories, like gilt funds, look rewarding. But we see extreme volatility in the returns of these funds and thus, they decline in value despite being the safest. So, you must be far more careful and cautious while selecting your fixed-income investment option.


Here are a couple of benefits dynamic bond funds can offer…

Dynamic bond funds have the flexibility to change the portfolio duration according to changes in the interest rate scenario.

Since the fund manager of dynamic bond funds chiefly banks on the interest rate movement and doesn’t prefer to hold bonds up to maturity, dynamic bond funds can generate attractive returns when the interest rates are expected to fall.

The benefit of investing at this juncture in dynamic bond funds is…

If RBI continues to reduce rates, dynamic bond funds many have a good run going forward.

Be wary of these risks…

If you think investing in debt funds isn’t risky, think again. Though the volatility may not be as high as in the equity market, there are still chances of you losing money. No investor wishes to experience this dreaded situation. With dynamic bond funds, if interest rates move in the direction opposite to the expectations of the fund manager’s, it can lead to serious losses for the investor.

At the same time, if liquidity issues crop up and the fund manager fails to sell a bond at a desired price, the losses can be substantial. Moreover, frequent churning can push the expense ratio of dynamic bond funds higher.

Going by the recent instances, the credit risk has been rising across debt fund categories. So far, dynamic bond funds have been affected less by the deterioration in the credit quality. Nonetheless, credit quality, in general deteriorates further, the risk profile of a dynamic bond fund might go up significantly as in addition to interest rate risks, credit risks could unexpectedly become more relevant for the dynamic bond funds.

Top Dynamic Bond Funds as on Jan 2021

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