Dynamic funds as open-ended debt mutual funds that invest across duration. These funds are suitable for an investment horizon of 3-5 years. These funds have the flexibility to invest across investment duration.
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Top Best Dynamic Bond Fund for long-term growth
Till Date CAGR
|Axis Dynamic Bond Fund (G)|
|Bandhan Dynamic Bond Fund (G)|
|Nippon India Dynamic Bond Fund (G)|
|ICICI Prudential All Seasons Bond Fund (G)|
|Kotak Dynamic Bond (G)|
|Quantum Dynamic Bond Fund (G)|
|SBI Dynamic Bond fund (G)|
|360 ONE Dynamic Bond Fund (G)|
|Baroda BNP Paribas Dynamic Bond Fund (G)|
|HDFC Dynamic Debt Plan (G)|
|DSP Strategic Bond Fund (G)|
|Aditya Birla Sun Life Dynamic Bond Fund (G)|
|Canara Robeco Dynamic Bond Fund (G)|
|Union Dynamic Bond fund (G)|
|UTI Dynamic Bond Fund (G)|
|PGIM India Dynamic Bond fund (G)|
|HSBC Dynamic Bond Fund (G)|
|Mirae Asset Dynamic Bond Fund (G)|
|HSBC Flexi Debt Fund (G)|
|ITI Dynamic Bond Fund (G)|
Dynamic bond mutual funds are open ended debt mutual funds which can invest in securities across durations. Their portfolio is quite flexible when compared to other debt funds. The fund’s performance depends on the fund manager’s expectation on the market and interest rates. Any wrong call can affect the fund’s performance adversely. Hence these funds are considered as moderate risk funds and do not suit conservative investors.
|Fund Name||5 Years Return||Expense Ratio|
|Kotak Dynamic Bond Fund||6.90%||1.30%|
|SBI Dynamic Bond fund (G)||6.50%||1.64%|
|Axis Dynamic Bond Fund (G)||6.80%||0.66%|
|IDFC Dynamic Bond Fund (G)||6.30%||1.62%|
|UTI Dynamic Bond Fund (G)||5.20%||1.56%|
SEBI defines dynamic bond funds as open-ended debt mutual funds that invest across duration. They follow a dynamic approach in terms of the maturity of securities in the portfolio. One of the main objectives of dynamic bond funds is to provide optimal returns in both falling and rising interest rate scenarios.
These funds shift the duration of the fund based on market scenarios. In a market scenario with falling interest rates, the fund might invest for a long duration. While, during a rising interest rate scenario, the funds invest in short duration funds.
Thus, the fund’s performance entirely depends on the portfolio manager of the fund house. The role of the fund manager is very crucial in dynamic bond mutual funds. His/her view about the market and interest rate can fetch good returns for the funds. However, the tables can turn another way too. If their call goes wrong, the dynamic debt fund can have huge losses.
During uncertain situations, the trends in interest rates are not noticeable. The interest rates might go up or down sharply, and dynamic funds might take a hit. This is the biggest risk in these funds.
Dynamic funds are taxed like any other debt fund. Short term capital gains (if redeemed within three years from the date of investment) are taxed at individual income tax slab rates. While long term capital gains (if redeemed after three years from the date of investment) are taxed at 20% with indexation benefit.
However, from April 1st 2023, the capital gains are taxed as per the investor’s income tax slab rate. This is irrespective of the investment holding period. Thus, debt mutual funds will no longer have the LTCG benefit.
The very nature of dynamic bond funds enables them to instantly switch between long term, mid term and short term securities. For example, in a scenario where the interest rates are about to fall, the fund manager can increase the tenure. In contrast, if the fund manager thinks that the interest rates have hit rock bottom and there is no scope for them to fall further, then he would reduce the tenure of the portfolio. In other words, the portfolio manager can address the risk of capital losses on long term bonds by reducing the portfolio’s average maturity.
The expectations in the change in interest rates guide the fund manager to trade bonds of varying maturities. In bond funds, the fund manager can increase holding in the medium term and short term securities while decreasing holdings in gilts.
Additionally, the manager can also invest in corporate bonds with high ratings. Investments in corporate bonds will ensure high accrual income. This strategy differentiates dynamic bonds funds from gilt funds. However, the tables can turn too. The fund manager’s opinion about the market can go wrong, and the dynamic debt fund can face significant losses.
Dynamic bond mutual funds are ideal for an investment horizon of 3-5 years. However, these funds don’t suit all investors. These funds are not for investors who expect fixed returns with low risk. Returns from dynamic bond funds depend on interest rate movements. Hence the risk in them is moderately high.
These funds are meant for investors who want to participate in the bond market but do not want to take any decisions on interest rates. Conservative investors who do not want to bet their investments on fund managers’ decisions can stay away from dynamic bond mutual funds.
Dynamic bond funds are subject to interest rate risk and credit risk. They do not have restrictions on the duration and credit quality of securities they can invest in. Hence their broad portfolio might affect the fund’s performance when the market moves against the fund manager’s expectations.
Therefore, investors who understand the risk in these funds can invest in them for a duration of 3-5 years. However, Scripbox doesn’t recommend these funds to investors.
Following are the things to consider before choosing dynamic bond funds to invest.
Dynamic bond funds have the flexibility to invest across investment duration. Hence it can be considered a long and short duration fund. Furthermore, they do not have any restrictions on investing across the credit quality spectrum. Additionally, they are subject to the fund manager’s outlook on the market and interest rates. Hence these funds have high credit risk, interest rate risk and fund manager risk.
“Scripbox does not recommend these funds in this category. We believe that the potential incremental return is not justified by the higher credit risk and higher interest rate risk.”
A corporate bond fund is a type of mutual fund that invests more than 80% of its assets in corporate bonds. Corporate bond funds generate returns using the credit opportunities of the corporate debt papers. The underlying securities of corporate bond funds can be either high rated and low rated securities or both. Therefore, the funds’ credit quality can be low, and they can carry significant credit risk.
On the other hand, dynamic bond funds dynamically adjust the investment portfolio between short term and long term bonds. They strategically take advantage of the fluctuating interest rates. Dynamic bond funds target to generate optimal returns in both rising and falling market scenarios.