What is a Dynamic bond fund? These funds are basically debt-based, open ended fund schemes which take a more dynamic perspective towards securities present in the portfolio and their maturity. SEBI has classified such funds as open-ended plans that invest across a wide range of tenors. These plans may ensure higher and lucrative returns in the long run, via switching the duration on the basis of various scenarios and circumstances in the market. Yet, they may be impacted in case there is something wrong with the fund manager’s strategy in terms of the duration.
Dynamic bond funds are considerably affected by prevailing rates of interest. When rates decrease, bond funds for longer durations reap the highest rewards. Yet, whenever the interest rates slide upwards, these long duration plans are impacted. As a result, these dynamic mutual funds are perceived as a great way to overcome bond market fluctuations or volatility. This is because there is always ample flexibility to change to securities for shorter durations.
Vital things worth remembering
The role played by the manager of the fund is vital and should be noted carefully. The perception of rates of interest for the manager may lead to attractive returns from mutual fund plans. However, in case there is any wrongful strategy followed, there could be losses to bear for investors. This is the component of risk for dynamic bond funds. Rates may sometimes fluctuate sharply, thereby affecting the performance of these dynamic mutual funds.
The abilities and experience of the fund manager are key attributes worth considering in this regard. These funds are ideal for those investors who wish to take part in rallies taking place in the bond markets. However, they are suitable for those not willing to decide on rates of interest. Those who wish to stay secure and opt for comparatively lower returns can remain with funds for a shorter duration. The longer tenor funds may offer attractive returns although volatility levels are automatically higher. Dynamic bond funds are those to be invested in by you in case you wish to rely on the manager of your fund to give you a taste of both short and long term benefits. Yet, conservative investors should not opt for these investments. Those with moderate risk appetite will do fine in this regard.
Another thing to remember in case of dynamic bond funds is the taxation levels. If you are investing for a minimum of 3 years, then they will be taxed as long-term capital gains taxes at 20% (with indexation benefit). If you redeem the same within a period of 3 years, then short-term capital gains taxes will be applicable based upon your own income tax slab.
Key attributes in a nutshell
Summing up, here are some of the major attributes of dynamic bond funds in brief:
- Vital role played by the fund manager.
- Dependence on various aspects including government measures, fiscal deficits, prices of oil, etc.
- Moderate to high risk levels although strategy based on duration is a plus point.
- Bond costs go down with higher interest rates and vice versa.