A recent rave in the ever-changing investment landscape is dynamic bond mutual funds. Find out what it means, the benefits, features, and whether or not you should include it in your portfolio. Here, professional business coach, Shamir Kumar Nandy walks you through everything you need to know about dynamic bond mutual funds.
What are Dynamic Bond Mutual Funds?
Dynamic mutual funds just like the name implies are “dynamic. This means it is active trading on securities based on the fluctuations of the interest rates. While the dynamic bond mutual fund is a class of debt fund under government securities. They come with a different dynamic approach.
Here is how it goes:
A dynamic mutual fund is more open-ended debt mutual fund. The fund manager “dynamically” trade various instruments of any duration according to the anticipated changes in the interest rates. This is quite different from other types of debt funds like 10-year gilt funds which already have a 10 year fixed maturity duration.
“Bond funds are greatly influenced by the interest rates in the market. For instance, if the interest rates go down, the long duration bond funds benefit the most and when it goes down, the long duration bond funds take the hardest hit,” Shamir Kumar Nandy explains.
Hence, the fund manager is able to take advantage of the volatility of the bond market scenario as he can always switch from short term debts to long term duration debt. The entire movement and decision depend on the fund manager working to benefit from market appreciation.
What are the features and benefits of Dynamic Bond Mutual Funds?
Fund managers play a key role
The fund manager plays a crucial role in the dynamic bond mutual fund and its decision can either yield a high return or loss. His/her ability to make the right choice during those market changes and interest rate cycles matters a lot.
Asset allocation is dynamic
As said earlier, dynamic funds are dynamic-that is they are flexible. This means there is no restriction in investment across various securities. The fund manager does not have to follow any investment mandate. Rather, there is the freedom to invest in securities of different duration.
Based on the interest rate movement
“Dynamic bond mutual funds are all about navigating a fluctuating interest rate scenarios. Bond markets are generally affected by the interest rate. The fall in the interest rate is a win for bonds. While a rise in the interest rate can lead to a loss in bonds. This means if interest rates fall in the short term, the fund manager can divert to the long term in order to minimize risk” says Shamir Kumar. “ Holding of different securities duration will not only help minimize risk but also generate income returns” he adds.
Dynamic bond funds are a class of debt instrument associated with low risk. Plus, risk can be minimised with the duration strategy being employed. However, they still carry a certain degree of risk and can be regarded as a moderately high one. This is because the interest rates can do up and down sharply and it can lead to a loss. Besides, it is like an investor is betting on the fund manager’s ability to make the right decision in altering the portfolio.
The interest rate and returns can be influenced by macroeconomic factors as well. This include changes in government policies, currency rates, oil and gas prices and many more. Investing in long term tenure in order to minimise short-term risks is the way to go.
Should you invest in Dynamic Bond Mutual Funds?
Dynamic bond mutual funds are riskier when it comes to debt fund categories. Therefore, a conservative investor who wants to generate lower returns might find it a bit risky. And any investor who is not ready to lay bets on the fund manager’s ability can stay away from dynamic bond mutual funds.
Moreover, “it is better not to go for dynamic mutual funds if your investment life span falls below 3-5 years. Long duration investment is more volatile but they can generate good returns” Shamir Kumar Nandy advises. Again, when it comes to investing in dynamic bond mutual funds, it all depends on your risk tolerance and investment goals.