The Right Time To Pick Dynamic Bond Funds

The Indian equity market has had an exceptionally volatile few months, with a variety of negative cues triggering fresh losses. From the global economic slowdown, to rising inflation and the consequent high interest rates, and the ongoing banking sector crisis in the US, both the global and domestic equity markets have enough and more to be concerned about. Investors are eagerly looking for an oasis of calm and stability, in the ongoing maelstrom of volatility, and the debt market is fast becoming an extremely appealing option in terms of both stable and higher returns. The current high interest rate regime has prompted a rise in the returns offered by bonds and many investors are keen on capitalise on this opportunity. 

Dynamic bond funds make a mark

The debt fund category consists of a wide variety of options, from liquid, ultra-short and short-term bond funds to schemes which cover the longer end of the spectrum and all of these types have their own positives and negatives. However, at present, the one category which can help deliver a stable investment experience is the dynamic bond fund. This category fund, which are suitable for all seasons and reasons, offer you multiple benefits such as being tax-efficient and delivering reasonable returns, flexible investment horizons and better liquidity than other traditional fixed income options.  

Dynamic bond funds have a diversified portfolio and invest across gilts and corporate bonds, thus offering an optimal combination of safety and high returns in all market conditions. Further, such funds operate on the basis of dynamic duration management which involves maintaining a modified duration in a range of 1-10 years. Here, for duration management, some fund houses are known to rely on an in-house model. The aim of such a scheme is to increase the duration of the bonds it holds, when the interest rate is expected to fall, to benefit from capital appreciation. Alternatively, the dynamic bond fund reduces the duration of its holdings when the interest rate is expected to rise, to mitigate risks from marked-to-market loss. In this manner, these funds are able to provide you stable yet robust returns by playing on the interest rate-yield equation in an optimal manner and capitalising on market scenarios. 

Is it right for you?

While a dynamic bond fund is suitable for all types of investors, especially in volatile markets, you should consider the following aspects while investing in dynamic bond funds. First of all, while dynamic bonds funds are quite safe, especially due to their modified duration strategy, your investment should be in an exceptional asset management company with a solid track record of proven returns. Further, since your investment would face its primary risk from the error of judgment of the fund manager, invest in a scheme helmed by an experienced fund manager who has proven their ability in navigating different market scenarios adeptly. These two factors can help you limit potential risk to a high degree but it is important to remember that all market-linked investments do pose a certain amount of risk. 
While choosing a dynamic bond fund, zero in on a scheme which has offered steady return across market cycles. For instance, the ICICI Prudential All Seasons Bond Fund which has a history of over a decade and has witnessed multiple interest rate cycles, is one scheme which has managed a strong showing by capturing the upside in the falling rate cycles between February 2015 to 2017 and Feb 2019 to Feb 2021, and also protected the downside during the rising rate cycle of 2017-2019 and the one which is currently ongoing.

The next factor to consider is the tax efficient nature of dynamic bond funds and how these schemes can help you limit your tax outgo in a sustainable manner, especially in comparison with traditional investment options. Dynamic bond funds are taxed akin to other debt instruments and enjoy the indexation benefit on longer term investments, which allows you to subtract the inflationary value from the total returns at the end of the tenure. Post indexation, the returns on these funds are taxed at 20%. Such indexation benefit is not available on traditional investment options. 

With these aspects in mind, a dynamic bond fund could make a solid addition to your portfolio, especially in the current high volatile market.  

(Author: Yogendra Singh Tomar, CEO ,Moneybus Financials IMF LLP)