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Dynamic Bond Funds- Working, Returns, Taxation, Points to Consider, Best Dynamic Bond funds

  • Rudri Rawell
  • Jan 12 2022
  • 7 minutes
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Falling interest rates on traditional bank savings accounts and fixed deposits are driving investors towards alternative and safe investment options like mutual funds. Today, there are many varieties of mutual fund options available to choose from. Depending on personal financial goals and risk/return appetite, an investor can select a mutual fund to park his/her money. Many new investors may not be aware of all the different types of funds that can be considered for investment. One such variety is dynamic bond funds which falls within the category of debt funds.

Here, we will explain everything that an investor needs to know about dynamic bond funds and provide fund recommendations within this category.

What are dynamic bond funds?

Dynamic bond funds invest in debt securities of varying maturities. The fund manager invests across various debt securities with the objective to reduce risk and fetch a higher rate of return. Dynamic Bond Funds are different from other debt funds since the fund manager can shift from a medium-term bond to a low-duration bond and vice versa. 

There is no fixed duration rule followed in these funds. The idea is to make the most of changing interest rates on debt securities. For example, if the interest rate on a short-term bond falls, the fund manager may shift to a medium-term bond to reduce interest rate risk.

Returns from dynamic bond funds

As per data on historical returns, dynamic bond funds are known to have performed better than short-term securities. Investors can have better chances of fetching higher returns by investing in dynamic bond funds as compared to other fixed-income mutual funds or bank savings accounts. These can also offer a capital gain in case the value of the bond rises. However, fund returns depend on the fund manager’s expertise in making decisions as per market movements. 

Taxation on dynamic bond funds

Returns from dynamic bond funds are taxed just like any debt investment. If these investments are held for less than three years, the returns are treated as short-term capital gains and are considered part of the total income of the investor. The earnings are taxed as per the applicable income tax slab of the individual. If the fund units are held for more than three years, the returns are considered part of long-term capital gains and are taxed at 20% with indexation benefit.

Important points to consider while investing in dynamic mutual funds 

Investors must make a note of below-mentioned factors while investing in a dynamic bond mutual fund:

Macroeconomic influence

Interest rate movements and therefore, the returns from bonds can be influenced by macroeconomic factors like government policy changes, fiscal deficit, oil prices, etc. An investor should be aware of any major changes that are expected and try to remain invested for a longer tenure. This can help in eliminating short-term risks.

Human error

One of the major risk elements faced by a dynamic fund is the judgment error on part of the fund manager. The duration strategy can fetch good returns only if the fund manager keeps altering the portfolio as per the rate changes in the market. 

Investment flexibility

Most debt funds must comply with the investment standards set by SEBI as per the fund category. For example, a long duration debt fund must invest a majority of its corpus in long-term securities. With dynamic bond funds, there is no fixed investment mandate to be followed. These funds can invest in any debt securities to make the most of interest rate movements.

Dynamic bonds are different from other debt funds. Since investment decisions in a Dynamic Fund depend on the interest rate movements, the fund manager plays an important role in the fund’s success. Therefore, it is important to learn about the fund manager’s past performance across various interest rate cycles before making an investment decision.

Who should invest in dynamic bond funds?

Investment in dynamic bond funds is ideal for investors who would like an expert fund manager to make investments in debt instruments as per interest rate movements. Therefore, new investors who have a moderate risk appetite and an investment horizon of 3-5 years should consider investing in these funds. 

It is ideal to invest through an SIP (Systematic Investment Plan) as it allows a certain level of protection against volatility. Returns from dynamic bond funds are dependent on interest rate movements and investors must consider this factor while making their decision. 

Best Dynamic bond funds to invest recommendations

Here’s a look at some of the recommended dynamic bond funds:

IDFC Dynamic Bond Fund
The objective of this fund is to generate long-term returns by active management. It primarily Invests in money market & debt instruments including G-Sec across various durations.

Inception DateJanuary 01, 2013
Benchmark NameCrisil Composite Bond Fund Index
Fund ManagerSuyash Choudhary
Expense Ratio0.73%
RiskLow to medium

Historical Returns of the Fund (annualised)

1-Year2-Year3-Year5-YearSince Inception
2.91%7.96%9.16%8.02%9.15%

Axis Dynamic Bond Fund
This open-ended scheme endeavors to generate optimal returns while ensuring liquidity through active management of investments in debt and money market instruments.

Inception DateJanuary 01, 2013
Benchmark NameNIFTY Composite Debt Total Return Index
Fund ManagerR Sivakumar, Devang ShahKaustubh Sule
Expense Ratio0.25%
RiskModerate

Historical Returns of the Fund (annualised)

1-Year2-Year3-Year5-YearSince Inception
4.50%8.48%9.48%8.14%9.30%

ICICI Prudential All Seasons Bond Fund
The scheme aims to generate returns through investments across various debt and money market instruments. It seeks to maintain an optimum balance between returns, risk and liquidity.

Inception DateJanuary 01, 2013
Benchmark NameNIFTY Composite Debt Total Return Index
Fund ManagerManish BanthiaAnuj Tagra
Expense Ratio0.61%
RiskModerately high

Historical Returns of the Fund (annualised)

1-Year2-Year3-Year5-YearSince Inception
5.21%8.72%9.41%8.37%10.42%

PGIM India Dynamic Bond
The objective of the scheme is to generate returns via active portfolio management made up of debt and money market instruments.

Inception DateJanuary 01, 2013
Benchmark NameCRISIL Composite Bond Index
Fund ManagerPuneet Pal
Expense Ratio0.59%
RiskModerate

Historical Returns of the Fund (annualised)

1-Year2-Year3-Year5-YearSince Inception
3.76%6.64%8.15%7.85%8.73%

Kotak Dynamic Bond Fund
The scheme seeks to maximise investor returns through actively managing a portfolio of investment comprising debt and money market securities.

Inception DateJanuary 01, 2013
Benchmark NameNIFTY Composite Debt Total Return Index
Fund ManagerDeepak Agrawal
Expense Ratio0.50%
RiskModerate

Historical Returns of the Fund (annualised)

1-Year2-Year3-Year5-YearSince Inception
4.10%8.11%9.26%8.57%9.43%

Conclusion

Dynamic bond funds provide an opportunity to investors who would like to go beyond investment choices like bank savings accounts or plain vanilla debt investments. These funds can provide better return-generating opportunities to investors who have moderate risk appetite.

FAQs

  1. How long should I stay invested in Dynamic Bond Mutual Funds?
    Dynamic bond funds can have better chances of generating positive returns over a 3-5 year timeline. Therefore, you should ideally remain invested in these for the medium term.
  1. Where do Dynamic Bond Mutual Funds invest?
    Dynamic bond funds invest in short-term and long-term bonds and keep switching between investments as per market conditions.
  1. Are dynamic bond funds worth buying?
    Dynamic bond funds are ideal for investors who would like to explore fixed income instruments of varying maturities and make the most of interest rate fluctuations.
  1. When should I invest in dynamic bond funds?
    You can invest in dynamic bond funds as per your personal financial goals. These funds aim to make the most of interest rate movements by switching between investments and are suitable for investors who wish to rely on the fund manager’s expertise for portfolio construction.
  1. How to invest in dynamic bond funds?
    You can invest in dynamic bond funds by downloading the Finity app on your smartphone. This app allows you to select and invest in the best mutual funds as per your risk and return requirements.

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