Identifying the right debt fund for your investors can at times be a daunting task, especially when interest rates are likely to go up or the future course of the rate is difficult to predict.
In times like these, there is one fund that can save you from the confusion — dynamic bond funds. These funds are especially designed to tide over interest rate volatility.
Dynamic bond fund managers have the freedom to invest across securities and maturities depending on the outlook. If a fund manager expects the rates to go up, he can shift investments from long term to shorter maturity papers so as to minimise the impact of rate hike on the investments.
When to recommend
As stated above, dynamic bond funds make perfect sense when there is no clarity on future movement of interest rates. In fact, the fund is considered as 'all weather' debt fund and can be recommended to investors with medium-term horizon.
Lovaii Navlakhi of International Money Matters believes that the fund makes sense for investors with at least 3-4 years in hand. Further, he said that the allocation should not be very high as there is high volatility and a lot depends on the skill set of the fund manager.
How to choose the right fund?
Fund selection is an important aspect when recommending a dynamic bond fund.
Because of broad flexibility given to fund managers, the quality and tenure of underlying papers differ across schemes. As an investor, you should assess the credit quality of underlying assets to determine if the fund suits your risk profile. You should also check the risk matrix of the fund to understand the maximum risk the fund manager intends to take.
The past record of the fund and the fund manager should also be looked at.
"Dynamic bond fund gives the fund manager complete flexibility. They can allocate funds to corporates, G-sec, and various other bonds with varying maturity and tenures. Invest in a fund only if you have confidence in the fund manager," said Lovaii Navlakhi.
"The present situation is ideal for investment in dynamic bond fund. But, make sure you properly assess the tenure and quality of underlying papers before recommending. Also, check the past record of the fund and its manager to evaluate the quality and consistency of the fund," said Viral Bhatt of Money Mantra.
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