Returns in a bond fund are influenced by interest rate movement in the market. Long duration bond funds benefit the most when interest rates go down. However, in a rising interest rate scenario, these funds are not recommended.
Investing in bond funds thus requires an understanding of the interest rate movement which is affected by various factors such as inflation, government borrowing, RBI’s monetary policy, etc.
Dynamic bond funds are ideal for those who cannot comprehend interest rate movements. These funds are open-ended debt schemes that invest in securities of varying maturities. They make sense where investors want to ride the interest cycles and have a moderate to high risk appetite.
Riding the interest rate cycles
Fund managers of a dynamic bond fund proactively manage the interest rate movement. They dynamically alter allocations between long-term and short-term bonds to increase/decrease the portfolio’s maturity for taking advantage of interest rate fluctuation. This helps investors to sail through interest rate volatility.
Let’s take an example. If a fund manager anticipates a fall in interest rate, the manager may buy long term securities and discard short term maturity papers for increasing the portfolio’s duration.
Mahendra Jajoo, CIO-Fixed Income, Mirae Asset MF shares that the flexibility to alter the portfolio is a strong benefit of dynamic bond funds.
Moderate to high risk appetite
As the returns depend on interest rate movement, these funds are recommended for those having moderate to high risk profile. Further, investors must have a time horizon of 3 years and more, said Mahendra.
2 key things to remember before investing:
Focus on credit quality:
On the credit side, Mahendra suggests opting for those dynamic bond funds which invest in AA+ and above rated instruments.
Periodic monitoring:
It is advisable to monitor the performance of dynamic bond funds once every quarter.
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Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
