EVEN THOUGH DEBT as an asset class has faced some turbulent times of late, it provides some interesting investment opportunities. For a medium- to long-term investor, dynamic bond funds are worthy considering.
What are dynamic bond funds?
There are debt funds for different durations of investment. For instance, to park surplus cash for a short term, investors use liquid funds or short-term bond funds. Investors looking to invest in debt funds purely from a long-term risk appetite perspective choose long-term bond funds. But what if you are ready to take a little more risk of volatility? In that case you can choose the dynamic debt funds.
As per the Securities and Exchange Board of India, dynamic bond funds are open-ended debt schemes that are allowed to invest across a spectrum of duration. Based on the varying market scenarios, this category of scheme allows the fund manager to tweak the duration of the portfolio, with an aim to generate higher returns. The fund manager can take a call to change investment patterns within debt category across a whole range of duration—right from long term bonds like government securities to short term debt papers like short-duration corporate bonds.
What makes these funds attractive now?
The investment calls taken are largely based on the macroeconomic factors that determine the overall interest rate trajectory in the near to medium term. At present, the interest rates are going down and are expected to remain so due to the measures taken by the government to spruce up the economy. Moreover, fiscal deficit and current account deficit also seem to be pointing to conditions favourable to a lower interest rate in the near term.
Interest rates and prices of bonds are inversely related, that is they move in the opposite directions. This means that lower interest rates or interest rates moving downwards are likely to result in prices of bonds going up. It must be remembered that for longer-term investments government bonds with a sovereign guarantee are among the popular instruments for investment. Accordingly, lower interest rates could mean that the prices of such long-term papers could go up, providing an arbitrage opportunity to investors who are amply prepared in advance. The dynamic bond funds have the scope to do that, among many other things.
How do you choose one?
When looking for a dynamic bond fund, the important aspect to check is the consistency in return profile over the years. Secondly, check if the fund house has a well-defined system on which which the allocation is decided. A proper system will ensure that the fund remains agile and makes the required changes in the portfolio according to the changes happening in the macro-economic environment.
One fund that ticks all of these requirements and has been a flag-bearer for the category is ICICI Prudential All Seasons Bond Fund. As of May 30, 2020, this fund has out-performed its peer group average on one-, three- and five-year periods. Moreover, the portfolio investment calls are based on an in-house model that takes into account various factors such as current account deficit, fiscal deficit as well as credit growth to indicate the steps to be taken. If the past performance is something to go by, this model has worked in favour of the fund, and its investors. Currently, the fund has increased its exposure to longer maturity instruments having the best level of security—sovereign government bonds.
To sum up, dynamic bond fund as a category is poised to reap the benefits of the current bout of volatility seen in debt markets. As a long-term investor, it is important to ensure that you have a debt fund which keeps up with the changing marcos.
Author is director of Vardhana Financial Solutions Private Limited.