Can we bet on dynamic bond funds in these uncertain times?

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Dynamic bond funds are touted as the best regimes to bet on in times of uncertainty like today. Fund managers and advisers always tell investors that they should choose dynamic bond funds whenever they cannot respond to future interest rate movements. Lately, some of the plans in the category have shown impressive returns. The best in class are delivering double-digit returns over the past year, while many other debt funds are struggling. Are these diets finally proving their worth?

UTI Dynamic Bond Fund offers yields of 11.54% over one year, followed by the Franklin India Dynamic Accrual Fund with yields of 9.81%. Fund advisers believe that these superior schemes have benefited from the tactical appeals of fund managers.

“It’s like stock picking. Some fund managers were able to take advantage of the movement in yields by taking a few tactical calls in time and as a result yields rose. Overall, the rate scenario is visible right now it’s only a matter of time, so investors and fund managers are sticking to short-term instruments,” says Joydeep Sen, author and corporate trainer.

Another point to note is that many systems in the dynamic bond category offer dismal returns. Of the 27 plans in the category, 23 plans offered returns between 2 and 6% in one year. Plans like Mahindra Manulife Dynamic Bond Yojna offer returns of 2.87% in one year. This disparity is due to calls taken by individual fund managers in the schemes. Many of the laggards were inclined towards medium-term instruments, advisers say.

“Many of these funds have a higher allocation towards medium and long duration instruments. In the current environment, yields are up and should rise further. This makes the funds vulnerable to high volatility on the downside of value. market,” says Rushabh Desai, Founder of Rupee at Mumbai-based Rushabh Investment Services.

These fund advisers do not recommend dynamic bond funds at this time for a variety of reasons. One of them is the lack of liquidity in the bond market. “I don’t think it makes sense for investors to go for dynamic bond funds. These funds are similar to Flexi Cap Funds in the equity segment. However, flexing and maneuvering in different debt instruments on the yield curve can be much more difficult and complicated. Liquidity can be a big issue and is extremely important in the debt market. Lack of liquidity in the corporate bond market may limit the flexibility of these funds and they may not be able to maneuver across the yield curve. This can have a huge impact on the fund and its net asset value. In the current scenario, I think it’s better to stick with accrual funds if you don’t want to take the duration risk,” says Rushabh Desai.

Joydeep Sen says investors who want to make it easier to invest in debt don’t need to opt for dynamic bond funds. He thinks sticking to risk appetite or time horizon may be easier and a better way to navigate the debt market. “You don’t always need the fund manager to do this job. If you have a risk appetite and can stay for a long time, you can opt for a gilt fund. If you don’t want to take risk or have a shorter investment horizon, stick to liquid, overnight and short-term funds,” says Joydeep Sen.

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