Dynamic Bond Funds- Key Aspects You Need To Learn About

The investors who are not willing to put their money into debt funds though they are safe when it comes to being able to keep up with the interest rates cycle. The Dynamic bond funds are known as debt mutual funds and it alters allocation between short and long-term bonds. The investors can take benefit from the change of interest rates.

Dynamic bond funds are dynamic in nature according to composition and maturity profile. As per its objective, it delivers optimum returns when the market is rising or falling depending on manager and portfolio management. The funds generally have big assets under management. There may be a lengthy pause between interest rate changes. It might affect the investors’ income. Thus, dynamic bond funds are a nice option for those who want to play to the rate cycle. Fund managers trade instruments of maturity periods according to anticipated rate change. While an interest rate is falling, the fund manager dynamically increases the holdings of long-term instruments like gilts.

There are many features and benefits of dynamic bond funds. The view of a fund manager about interest rate becomes crucial. As seen during 2017, when RBI takes contradictory steps against the fund manager’s expectations, the profits can be hampered. Oil prices, government policies and fiscal deficit can affect the returns of dynamic bond funds. One can minimize the short-term risk by staying invested for extended periods. These bond funds also have different risk factors. These funds are better than short term funds as they are not able to use what is known as the duration factor. But if the manager can’t reduce the portfolio as per requirement then previous profits can be affected.

To gain indexation perks on capital gains the bond fund investors need to hold the investment for a minimum three years. Dynamic bond funds differ from the rest of the debt funds. A heavy shift in the cycle of interest can end in a higher tax incidence. The bond prices are inversely proportional to changing interest rates. When the rate of interest is increasing, the bond price will decrease and increase if the interest rate decreases.

When the interest rate continues to fall, the bond prices rally according to remaining maturity. A fund manager can hold short and medium-term corporate bonds which generate interest income. Debt funds should always adhere to the investment mandate. The short-term bond fund is able to invest in short term security only and the same goes around. Dynamic bond funds should follow this rule. These funds can be invested in the long-term securities for about a month also, depending on interest rate movement.