A Brief Note on Dynamic Bond Funds

Dynamic bond funds are open-ended debt mutual fund schemes that invest across debt instruments and maturities based on the view of the fund manager. 

Such funds invest in debt and money market instruments such as government securities (G-Secs) and corporate bonds, among others. Investors who don’t know much about the economy and interest rates can opt for dynamic bond funds. 

Any jump in interest rate does not augur well for debt mutual funds. Such schemes lose money when rates go up. At the same time, in a falling interest rate cycle, the debt fund earns good returns. 

In case investors want to leave the task of taking a call on interest rates to the fund manager, they can go in for dynamic bond funds.

Dynamic bond funds tend to switch between short-term and long-term securities in time. In case the fund manager anticipates that the interest rates are about to fall, they switch to long-term bonds. 

At the same time, if they feel that the interest rates have reached the lowest peak and will only experience a jump from here, they safeguard the losses from long-term bonds by switching to short-term bonds. This move addresses any concerns due to abrupt interest rate changes. 

In addition, the fund manager of a dynamic bond fund also invests in gilts or corporate bonds as per their expectation of the interest rate change.

There are 22 schemes that fall under the dynamic bond mutual fund category, with total Assets Under Management (AUMs) registering at Rs 30,470 crore as of September-end, according to the Association of Mutual Funds in India (AMFI)  data. 

About a year ago, these numbers stood at 24 schemes with total AUMs amounting to Rs 22,083 crore as of September 30, 2022.

An investor with an investment horizon of at least two to three years and with some appetite for intermittent volatility can choose dynamic bond funds. However, those looking forward to investing for shorter durations must go in for short-term debt funds.