Here is a list of Top 5 Dynamic Bond Funds for 2017 that would fetch you consistent returns during falling interest rates:
Look at the interest rates. Sometimes up, sometimes down. Seems like replicating an ECG. Or maybe reflecting the investor’s state of mind to venture or to escape. Well, the overall dwindling interest rates might be making your lives uncomfortable. If you are a risk-averse investor, then things are seemingly becoming difficult day-by-day. You may be searching for a reliable investment haven. Something which would give you stable returns, irrespective of the dynamism outside.
You obviously don’t want to move to equity. You are apprehensive of losing money. You have always seen debt funds in good light. But the recent turn of events has left you perplexed. You can’t find any other option apart from short-term funds/long term funds.
Try Dynamic Bond Funds!
Dynamic bond funds are an incredible category of mutual funds. Especially, the risk-averse investors would love them. They would enable you to sail through the interest rate volatility to generate consistent returns.
These funds live by their name. If you look at the investment strategy of Dynamic Bond Fund, it’s quite robust. It involves continuously aligning the average maturity and duration of the portfolio as per the changing interest rates. The fund manager enjoys a lot of flexibility to decide portfolio composition. He may go for both short-term as well as long-term securities. The holdings would be very diverse to include certificate of deposit, commercial paper on one hand. On the contrary, it may also consist of corporate bonds and GILT securities.
The fund manager would place bets based on his interest rate outlook in future. Instead of sticking to duration/hold till maturity strategy, a combination of strategy is used. If he expects a rate cut in near future, he will take exposure to long-term papers. In this way, the fund earns by way of capital gains. Conversely, a hawkish perspective makes him seek refuge in high interest bearing short-term instruments. In this case, the fund generates high interest for the unitholders.
Still one of the questions remains unanswered.
Are dynamic bond funds safe?
Before making a leap, other facets needs to be explored. Particularly the ones related to risk. A comparative analysis needs to be drawn with other alternatives. One size need not fit everyone. If dynamic bond funds brought virtue to your neighbour, then it may not create a déjà vu in your case.
Suitability of Dynamic Bond Fund
A lot of speculation keeps hovering over the relevance of dynamic bond funds concerning investment horizon. The confusion is about whether to perceive it as a short-term/medium-term/long-term instrument. This confusion needs a resolution because it ultimately impacts the risk tolerance and risk capacity. If it’s a short-term instrument, then too much investment risk would seem entirely unwarranted. If it’s a medium to a long-term instrument, then accordingly it should give higher returns.
Now, let’s look ascertain the suitability of Dynamic Bond Fund by comparing it with other debt instruments.
Dynamic Bond Fund vs. Short-term Funds
A comparison of Dynamic Bond Fund with Short-term Funds reveals a startling fact. Short-term funds usually have an average maturity of 1-3 years. In contrast, Dynamic Bond Funds have an average maturity of 5-10 years. Ideally, being on the higher side of the tenure, these should generate higher returns at greater risk.
However, the reality is a bit different.
Considering a shorter investment horizon, dynamic bond funds couldn’t meet expectations. These faced a standard deviation or risk higher than Short-term Funds. But, generated a CAGR lower than Short-term Funds. In fact, short-term funds were able to give higher returns at the much lower level of standard deviation.
It means that dynamic bond funds ain’t meant for those seeking havens to park their short-term surpluses. For that, it’s better to invest in short-term funds like liquid funds.
Dynamic bond fund vs. GILT funds
Apart from choosing the right fund, timing your entry/exit is crucial in debt funds. You need to exit at the most opportune time to be able to book profits.
You may wonder “When should I exit the fund?”
Also read: When you should exit a Mutual Fund
You need to time your exit according to the behaviour of interest rates. If you feel that rates are going to rise, then prepare for an exit.
Timing your exit is vital especially in the case of GILT funds. It’s because of their excessive sensitivity towards interest rate fluctuations, currency movement, the government’s borrowing programme, and supply and demand.
Most of the securities in GILT funds have a longer average maturity & duration. The portfolio isn’t flexible enough to be adjusted across time horizons. So, it makes these a volatile bet. The bulk of gilt fund returns is generated during dovish rates. As soon as the interest rates spike, all the earnings are washed out.
If interest rates & timing the market ain’t your thing, don’t get into GILT funds. Instead, befriend dynamic bond funds. These are optimal funds for the medium term of say 5-10 years. Here, the fund manager will take good care of your money by dynamically managing the fund. The only catch would be any erroneous outlook of the fund manager.
That’s why along with the dynamic bond funds, remember to choose your fund manager wisely.
Top 5 Dynamic Bond Funds
When you invest in these, you need to use certain short listing parameters. Choose a fund that has a long fund history, consistently higher risk-adjusted returns and higher alpha. Along with that, it should have a lower expense ratio and lower standard deviation.
Based on the above parameters, following funds have been shortlisted.
For relatively high-risk seekers, ICICI Prudential Long Term Fund is a good bet. It has consistently given superior risk-adjusted returns and has the lowest expense ratio. It has the highest absolute volatility among all the funds. For moderate risk seekers, Canara Robeco Dynamic Bond Fund & Birla Sun Life Dynamic Bond Fund are safer bets. For low-risk seekers, UTI Dynamic Bond Fund & L&T Flexi Bond Fund are ideal investment havens.
Mutual fund investments are subject to market risks. Please consult your financial advisor before investing.