Dynamic Bond Funds

• Dynamic bond funds invest in debt instruments that have different maturities. Now, the performance of debt funds is inversely proportional to the changing interest rates. When the interest rates increase, the debt funds experience a decrease in returns. Contrarily, debt funds earn good returns in a falling interest rate cycle. The fund manager’s objective is to reduce this risk of changing interest rates and fetch a higher rate of return by investing across different debt instruments.
• Speaking about interest rates, it is crucial to note that there could be pauses between interest rate changes which can affect the returns on bonds too. Dynamic mutual funds do not follow a fixed duration. The objective here lies in making the most of the changing interest rates on debt instruments. For instance, the fund manager may shift to a medium-term bond to reduce interest rate risk when the interest rate falls on a short-term bond.

• Investors with a moderate risk appetite, preferring investments in debt instruments as per interest rate movements could ideally choose dynamic mutual funds. This is important as Interest rate movements based on macroeconomic policies and conditions dictate the returns from dynamic funds. Therefore, it is preferable that only those who understand these trends should consider investing in such funds. That being said, a systematic investment plan (SIP) is a good way to approach investing in Dynamic Funds as you could counter the interest rate volatility in a better way.
• The ideal investment horizon ranging from three to five years can be considered for investing in these funds - hence an investor looking to park their funds for a similar timeline can definitely consider this as an investment option.

The following are some features of dynamic mutual funds that intrigue investors:

• Investment Flexibility:
  One of the primary features of dynamic mutual funds is their ability to switch between long-term and short-term securities for making the most of interest rate movements as they have no fixed investment mandate to be followed, unlike other debt funds.
• Portfolio Churn:
  When the fund manager keeps changing the scheme portfolio according to the interest rates in the market, the fund could fetch good returns over its duration. The fund manager, at times, can invest in either gilts, corporate bonds or any other debt instruments depending on the change in interest rate.

The taxability of Dynamic mutual funds remains the same as how we tax debt funds. There are two types of taxable income from dynamic mutual funds - dividend and capital gains.

• Dividend taxation - The dividends received are added to the taxable income and are taxed as per the income bracket of the investor. In addition, there is a 10% TDS on dividend amount exceeding Rs. 5000 in a financial year.
• Capital gains taxation - Capital gains are taxed as per the investor’s income tax slab for a holding period of less than 36 months. If the holding period exceeds 36 months, then the fund is taxed at 20% with an indexation benefit. The indexation benefit enables investors to inflate the purchase price to account for inflation adjustment.

• Macroeconomic Influence:
  The macroeconomic factors of our country would influence the interest rates and thereby the returns from debt securities. Some of the factors that could influence interest rates are government policies, fiscal budget and deficit, oil and gas prices, currency performance etc. As an investor, one should be aware of the news to stay invested for a long tenure so that it helps mitigate short-term risks.
  
  Furthermore, if there is a recession and multiple entities fail to pay back their debts on time then a general fall in bond prices may cause the dynamic funds to see losses. This is a general credit risk that the funds may face.
• Management risks:
  In a dynamic fund, when a fund manager makes an error in judging the strategy then a risk is faced by investors. While the duration strategy can ensure good returns subject to churning of the portfolio to yield better returns, it is possible that a slight slip-up can cause loss. The scope for error is more here because, unlike other debt funds with a specific mandate on investment policy (such as long duration mutual funds), dynamic funds have little restrictions regarding investment strategy - hence their outcomes are more dependent on human effort and focus.

Dynamic mutual funds offer flexibility by investing in different-duration securities which could result in several benefits. They are:

1. Unlike short-term funds that SEBI restricts with duration mandates, dynamic mutual funds can offer better returns by investing in long-duration instruments that usually generate higher yields.
2. When compared to long-duration funds, dynamic funds can manage downside risk in a better way as long-duration funds cannot reduce the fund duration below the SEBI prescribed limits. Therefore, dynamic funds are less volatile when interest rate change.
3. These funds help in hedging from changes in interest rates and help in generating substantial returns.

• Mr. Manish Banthia is managing this fund since September 2012. As of March 31, 2023, the fund has an AUM of Rs. 8998.16 crore and the minimum investment value is Rs. 5000. The expense ratio of the fund is 0.62% under direct investment mode and there is no exit load if redeemed or switched out after one month from the date of allotment.

• This fund is being managed by Dinesh Ahuja since January 2011. As on March 31, 2023, the fund has an AUM of Rs. 2659.27 crore and the minimum investment value is Rs. 5000. The expense ratio of the fund is 0.87% under direct investment mode and there is no exit load if redeemed after one month from the date of allotment.

• This fund is being managed by Deepak Agrawal since May 2008. As on March 31, 2023, the fund has an AUM of Rs. 2544.76 crore and the minimum investment value is Rs. 5000. The expense ratio of the fund is 0.40% under direct investment mode and there is no exit load.

• This fund is being managed by Suyash Choudhary since October 2010. As of March 31, 2023, the fund has an AUM of Rs. 2266.39 crore where the minimum investment value is Rs. 1000. The expense ratio of the fund stands at 0.76% under direct investment mode and has no exit load.

• This fund is being managed by R Sivakumar since April 2012. As of March 31, 2023, the fund has an AUM of Rs. 1775.95 crore and the minimum investment value is Rs. 5000. The expense ratio of the fund is 0.26% under direct investment mode and currently has no exit load.