The dynamic bond schemes are open-ended debt schemes which follow a dynamic approach in terms of the maturity of securities in its portfolio. According to SEBI definition, dynamic bond funds are open-ended debt schemes investing across duration. Dynamic bond funds have the freedom to invest in bonds of any duration. Depending upon where it expects to earn maximum returns, the fund management team decides whether to invest in bonds maturing in a few months’ time or in the ones maturing several years later. Therefore, they are the most versatile type of debt funds available.
Madhup Kumar
These schemes have the potential to generate higher returns by shifting duration on the basis of market scenarios. However, if the duration call by the fund manager goes wrong, the schemes may suffer. These funds generally have huge assets under management, with portfolios worth several thousand crores.
Bond funds are impacted by interest rates prevailing in the market. When the rates go down, long duration bond funds are rewarded the most. However, in a high interest rate scenario, the long duration funds tend to lose out. Dynamic bond funds are thus considered a good way of tiding over such volatility in the bond market because of their flexibility to switch to short term securities.
The fund manager’s role in these schemes is very crucial. The fund manager’s view of interest rate can lead to good returns in these schemes and vice versa. Typically, a dynamic bond fund is ideal for investors who are not experts in making the right investment calls based on the interest rate movement. Investors with moderate risk appetite and investment horizon of atleast 3-5 years can consider investing in this type of funds. A SIP (Systematic Investment Plan) approach into such a scheme may work well but one should always remember that the returns in dynamic bond fund depend mostly on interest rate movement. Such funds also can take a tactical call between G-Sec and corporate bonds.
In 2020 thus far, the RBI has cut repo rate by 115 bps. Growth and inflation are also expected to come down which may provide further headroom to RBI to continue its accommodative stance. On the fiscal side, most of the market participants remain comfortable with government taking measures to combat COVID-19 impact due to absence of private credit demand. Keeping this in mind, the near term prospects for bond market appear to be bullish. As a result, portfolios tend to add duration during such times.
From an investor’s perspective, focus should be on accumulating spread assets to give better carry to the portfolio with tactical exposure towards longer term assets to give the capital appreciation flavor. This will help build portfolio which will help deliver better risk adjusted returns. As a result, investors with an appetite for volatility can consider investing in dynamic duration schemes.
There are several fund houses which offer this category of product and have generated a considerable track record over the years. When it comes to consistent performance, one of the stand out fund in this category is the ICICI Prudential All Season’s Bond Fund. This fund has given 8 per cent and more returns across various timeframes and in varying interest rate scenarios. What sets this fund apart from others in the category is that the duration calls taken is based on an in-house Current Account (CA) Model and absolute G-Sec yield levels. So, whenever the index level as per in-house valuation model starts moving into positive territory, the scheme increases duration and vice versa.
Off late, the scheme has dynamically added duration to the portfolio, mainly through G-Secs which may provide capital appreciation as RBI is expected to cut rates further. Further, the scheme may also invest in good quality corporate bonds with an aim to benefit from better accrual income. Thus, it provides investors to benefit from capital gains along with accrual Income. As of May 31, 2020, the fund over 1,3 and 5 years have generated returns to the tune of 12.3 per cent, 8.4 per cent and 9.5 per cent respectively, outperforming the average peer returns by a wide margin.
Madhup Kumar is partner, Inwise Wealth Consultancy LLP
The opinions expressed in this article are those of the author's and do not purport to reflect the opinions or views of THE WEEK
