Falling interest rates on traditional bank savings accounts and fixed deposits are driving investors towards alternative and safe investment options like mutual funds. Today, there are many varieties of mutual fund options available to choose from. Depending on personal financial goals and risk/return appetite, an investor can select a mutual fund to park his/her money. Many new investors may not be aware of all the different types of funds that can be considered for investment. One such variety is dynamic bond funds which falls within the category of debt funds.
Here, we will explain everything that an investor needs to know about dynamic bond funds and provide fund recommendations within this category.
Dynamic bond funds invest in debt securities of varying maturities. The fund manager invests across various debt securities with the objective to reduce risk and fetch a higher rate of return. Dynamic Bond Funds are different from other debt funds since the fund manager can shift from a medium-term bond to a low-duration bond and vice versa.
There is no fixed duration rule followed in these funds. The idea is to make the most of changing interest rates on debt securities. For example, if the interest rate on a short-term bond falls, the fund manager may shift to a medium-term bond to reduce interest rate risk.
Dynamic bond funds are worth considering for several reasons:
Dynamic bond funds are a type of mutual fund that invests in a mix of different fixed-income securities, such as government bonds, corporate bonds, and money market instruments. What sets them apart is their ability to adjust the duration and credit quality of their holdings based on the fund manager’s outlook on interest rates and market conditions. When interest rates are expected to fall, the fund manager may increase the allocation to longer-duration bonds for potential capital appreciation. Conversely, in anticipation of rising interest rates, the manager may reduce exposure to longer-duration bonds to limit potential losses. This flexibility allows dynamic bond funds to adapt to changing market environments and potentially optimize returns.
As per data on historical returns, dynamic bond funds are known to have performed better than short-term securities. Investors can have better chances of fetching higher returns by investing in dynamic bond funds as compared to other fixed-income mutual funds or bank savings accounts. These can also offer a capital gain in case the value of the bond rises. However, fund returns depend on the fund manager’s expertise in making decisions as per market movements.
Returns from dynamic bond funds are taxed just like any debt investment. If these investments are held for less than three years, the returns are treated as short-term capital gains and are considered part of the total income of the investor. The earnings are taxed as per the applicable income tax slab of the individual. If the fund units are held for more than three years, the returns are considered part of long-term capital gains and are taxed at 20% with indexation benefit.
Investors must make a note of below-mentioned factors while investing in a dynamic bond mutual fund:
Interest rate movements and therefore, the returns from bonds can be influenced by macroeconomic factors like government policy changes, fiscal deficit, oil prices, etc. An investor should be aware of any major changes that are expected and try to remain invested for a longer tenure. This can help in eliminating short-term risks.
One of the major risk elements faced by a dynamic fund is the judgment error on part of the fund manager. The duration strategy can fetch good returns only if the fund manager keeps altering the portfolio as per the rate changes in the market.
Most debt funds must comply with the investment standards set by SEBI as per the fund category. For example, a long duration debt fund must invest a majority of its corpus in long-term securities. With dynamic bond funds, there is no fixed investment mandate to be followed. These funds can invest in any debt securities to make the most of interest rate movements.
Dynamic bonds are different from other debt funds. Since investment decisions in a Dynamic Fund depend on the interest rate movements, the fund manager plays an important role in the fund’s success. Therefore, it is important to learn about the fund manager’s past performance across various interest rate cycles before making an investment decision.
Investment in dynamic bond funds is ideal for investors who would like an expert fund manager to make investments in debt instruments as per interest rate movements. Therefore, new investors who have a moderate risk appetite and an investment horizon of 3-5 years should consider investing in these funds.
It is ideal to invest through an SIP (Systematic Investment Plan) as it allows a certain level of protection against volatility. Returns from dynamic bond funds are dependent on interest rate movements and investors must consider this factor while making their decision.
Here’s a look at some of the top performing dynamic bond funds:
1. IDFC Dynamic Bond Fund
The objective of this fund is to generate long-term returns by active management. It primarily Invests in money market & debt instruments including G-Sec across various durations.
| Inception Date | January 01, 2013 |
| Benchmark Name | Crisil Composite Bond Fund Index |
| Fund Manager | Suyash Choudhary |
| Expense Ratio | 0.73% |
| Risk | Low to medium |
Historical Returns of the Fund (annualised)
| 1-Year | 2-Year | 3-Year | 5-Year | Since Inception |
| 2.91% | 7.96% | 9.16% | 8.02% | 9.15% |
2. Axis Dynamic Bond Fund –
This open-ended scheme endeavors to generate optimal returns while ensuring liquidity through active management of investments in debt and money market instruments.
| Inception Date | January 01, 2013 |
| Benchmark Name | NIFTY Composite Debt Total Return Index |
| Fund Manager | R Sivakumar, Devang ShahKaustubh Sule |
| Expense Ratio | 0.25% |
| Risk | Moderate |
Historical Returns of the Fund (annualised)
| 1-Year | 2-Year | 3-Year | 5-Year | Since Inception |
| 4.50% | 8.48% | 9.48% | 8.14% | 9.30% |
3. ICICI Prudential All Seasons Bond Fund –
The scheme aims to generate returns through investments across various debt and money market instruments. It seeks to maintain an optimum balance between returns, risk and liquidity.
| Inception Date | January 01, 2013 |
| Benchmark Name | NIFTY Composite Debt Total Return Index |
| Fund Manager | Manish BanthiaAnuj Tagra |
| Expense Ratio | 0.61% |
| Risk | Moderately high |
Historical Returns of the Fund (annualised)
| 1-Year | 2-Year | 3-Year | 5-Year | Since Inception |
| 5.21% | 8.72% | 9.41% | 8.37% | 10.42% |
4. PGIM India Dynamic Bond –
The objective of the scheme is to generate returns via active portfolio management made up of debt and money market instruments.
| Inception Date | January 01, 2013 |
| Benchmark Name | CRISIL Composite Bond Index |
| Fund Manager | Puneet Pal |
| Expense Ratio | 0.59% |
| Risk | Moderate |
Historical Returns of the Fund (annualised)
| 1-Year | 2-Year | 3-Year | 5-Year | Since Inception |
| 3.76% | 6.64% | 8.15% | 7.85% | 8.73% |
5. Kotak Dynamic Bond Fund –
The scheme seeks to maximise investor returns through actively managing a portfolio of investment comprising debt and money market securities.
| Inception Date | January 01, 2013 |
| Benchmark Name | NIFTY Composite Debt Total Return Index |
| Fund Manager | Deepak Agrawal |
| Expense Ratio | 0.50% |
| Risk | Moderate |
Historical Returns of the Fund (annualised)
| 1-Year | 2-Year | 3-Year | 5-Year | Since Inception |
| 4.10% | 8.11% | 9.26% | 8.57% | 9.43% |
Dynamic bond funds provide an opportunity to investors who would like to go beyond investment choices like bank savings accounts or plain vanilla debt investments. These funds can provide better return-generating opportunities to investors who have moderate risk appetite.
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