Getty ImagesDynamic bond funds are touted as the best schemes to bank on during uncertain times like now. Fund managers and advisors always tell investors that they should choose dynamic bond funds whenever they can’t take a call on the future course of interest rates. Of late, some of the schemes from the category have posted impressive returns. Toppers in the category are offering double-digit returns in the last one year, while many other debt funds are struggling. Are these schemes finally proving their worth?
UTI Dynamic Bond Fund is offering 11.54% returns in one year, followed by Franklin India Dynamic Accrual Fund with 9.81% returns. Fund advisors believe that these topper schemes have benefitted from the tactical calls of the fund managers.
“It is like stock picking. Some fund managers were able to take advantage of the yield movement by taking some tactical calls on time and hence the returns went up. Overall, the rate scenario is visible at the moment, it is just a matter of time. So, the investors and fund managers are sticking to the short-term instruments,” says Joydeep Sen, Author and corporate trainer.
Another point to note is that many schemes in the dynamic bond category are offering dismal returns. Out of the 27 schemes in the category, 23 schemes have offered returns between 2-6% in one year. Schemes like Mahindra Manulife Dynamic Bond Yojna are offering 2.87% returns in one year. This disparity is because of the calls taken by individual fund managers in the schemes. Many of the laggards were inclined towards medium-term instruments, say advisors.
“Many of these funds have higher allocation towards medium and long duration instruments. In today's environment, yields are moving upwards and are predicted to further move upwards. This leaves the funds vulnerable to sharp downwards mark- to -market volatility,” says Rushabh Desai, Founder, Rupee with Rushabh Investment Services, based in Mumbai.
These fund advisors are not recommending dynamic bond funds at the moment for various reasons. One of them is 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 like the Flexi Cap Funds in the equity segment. However, to flex and maneuver in different debt instruments across the yield curve can be way more difficult and complicated. Liquidity can be a big issue and is immensely important in the debt market. Lack of liquidity in the corporate bond market can 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 NAV. In the current scenario, my view is that it is better to stick with accrual funds if you don’t want to take the duration risk,” says Rushabh Desai.
Joydeep Sen says that investors who want to make investing easy in debt don’t need to opt for dynamic bond funds. He believes that sticking to either risk appetite or time horizon can 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 long, you can go for a gilt fund. If you don’t want to take the risk or you have a shorter investment horizon, stick to liquid, overnight, short-term funds,” says Joydeep Sen.
UTI Dynamic Bond Fund is offering 11.54% returns in one year, followed by Franklin India Dynamic Accrual Fund with 9.81% returns. Fund advisors believe that these topper schemes have benefitted from the tactical calls of the fund managers.
“It is like stock picking. Some fund managers were able to take advantage of the yield movement by taking some tactical calls on time and hence the returns went up. Overall, the rate scenario is visible at the moment, it is just a matter of time. So, the investors and fund managers are sticking to the short-term instruments,” says Joydeep Sen, Author and corporate trainer.
Another point to note is that many schemes in the dynamic bond category are offering dismal returns. Out of the 27 schemes in the category, 23 schemes have offered returns between 2-6% in one year. Schemes like Mahindra Manulife Dynamic Bond Yojna are offering 2.87% returns in one year. This disparity is because of the calls taken by individual fund managers in the schemes. Many of the laggards were inclined towards medium-term instruments, say advisors.
“Many of these funds have higher allocation towards medium and long duration instruments. In today's environment, yields are moving upwards and are predicted to further move upwards. This leaves the funds vulnerable to sharp downwards mark- to -market volatility,” says Rushabh Desai, Founder, Rupee with Rushabh Investment Services, based in Mumbai.
These fund advisors are not recommending dynamic bond funds at the moment for various reasons. One of them is 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 like the Flexi Cap Funds in the equity segment. However, to flex and maneuver in different debt instruments across the yield curve can be way more difficult and complicated. Liquidity can be a big issue and is immensely important in the debt market. Lack of liquidity in the corporate bond market can 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 NAV. In the current scenario, my view is that it is better to stick with accrual funds if you don’t want to take the duration risk,” says Rushabh Desai.
Joydeep Sen says that investors who want to make investing easy in debt don’t need to opt for dynamic bond funds. He believes that sticking to either risk appetite or time horizon can 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 long, you can go for a gilt fund. If you don’t want to take the risk or you have a shorter investment horizon, stick to liquid, overnight, short-term funds,” says Joydeep Sen.
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