If dynamic bond funds are meant to be managed dynamically—they increase their duration when interest rates fall and reduce it when interest rates rise—why have most of them lost out in the past 12-14 months? On an average, dynamic bond funds have lost 0.21% from November 2016 till date, when rates have risen. Short-term income funds returned 4.72%, in comparison. Are dynamic bond funds dead or is this just a temporary phase?
The point in being flexible
Dynamic bond funds are aggressive income funds where the fund manager can change the underlying portfolios drastically. Every debt fund is supposed to invest as per its mandate: so, short-term bond funds invest in shorter-tenured securities and long-term bond funds invest in longer-tenured ones. But dynamic bond funds don’t have such restriction. They can be long-term bond funds in one month and short-term in another, depending on where the interest rates are headed.
