Best Dynamic Bond Funds
About Dynamic Mutual 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.
How do Dynamic Mutual Funds Work?
Dynamic Mutual Funds possess the unique characteristic of having both a flexible maturity timeline and a constantly evolving portfolio composition. These funds are strategically designed to pursue optimal returns, adapting to upward and downward market trends. The fund manager of a dynamic debt fund employs a dynamic approach, actively adjusting the portfolio in response to fluctuations in interest rates.
Speaking of interest rates, it’s worth noting that there can be intervals of stability between shifts in interest rates. These interludes can significantly impact the performance of bonds. Therefore, Dynamic Mutual Funds emerge as an attractive choice for investors seeking consistent returns from their bond investments, irrespective of the prevailing interest rate dynamics.
Features of Dynamic Mutual Funds
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 to make 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.
Advantages of Dynamic Mutual Funds
Dynamic mutual funds offer flexibility by investing in different-duration securities, which could result in several benefits. They are:
- 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.
- 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 rates change.
- These funds help in hedging from changes in interest rates and help in generating substantial returns.
Risks of Dynamic Mutual Funds
Macroeconomic Influence:
The macroeconomic factors 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 few restrictions regarding investment strategy – hence, their outcomes are more dependent on human effort and focus.
Factors To Consider Before Investing in Dynamic Mutual Funds
Before investing in dynamic funds in India, several crucial factors warrant consideration:
- Expert Fund Management: Dynamic funds’ performance relies heavily on the fund manager’s skill in predicting interest rate movements. Investigate the fund manager’s historical performance across diverse interest rate cycles to gauge their expertise.
- Macroeconomic Awareness: Macro factors like government policies, fiscal deficits, and commodity prices can significantly impact interest rates and bond returns. Staying informed about these variables and adopting a longer-term investment horizon can help mitigate short-term risks.
- Risk Assessment: The primary risk in dynamic funds pertains to the fund manager’s decision-making. Success hinges on the manager’s ability to adjust the portfolio according to changing market interest rates. A misjudgment can result in losses.
- Investment Flexibility: Unlike many debt funds bound by strict investment mandates, dynamic funds have the freedom to invest in various debt securities based on interest rate movements. This flexibility enables them to adapt to evolving market conditions.
Who Should Invest in Dynamic Mutual Funds?
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.
Taxability of Dynamic Mutual Funds
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 – dividends 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 amounts exceeding ₹5,000 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, 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.
How to Invest in Dynamic Mutual Funds?
Investing in Dynamic Mutual Funds is simplified through your Angel One account. Here’s an overview of the process:
Step 1: Begin by logging in to your Angel One account using your registered mobile number. Validate the OTP and enter your MPIN.
Note: If you don’t have a Demat account with Angel One, you can easily open one by completing the KYC procedure and submitting the required documents.
Step 2: Determine the most suitable fund based on your financial goals and risk tolerance. You can assess each fund in the mutual fund section on the Angel One app. Here are some key factors to consider:
- Search for the specific fund you wish to invest in or explore recommendations listed by Angel One across different categories.
- Analyse the fund’s historical performance, tax implications, constituent sectors, and individual stocks it holds.
- Utilise the provided calculator to estimate potential returns.
- Evaluate the fund’s risk level and align it with your own risk tolerance.
- Take into account the fund’s ratings provided by reputable rating agencies, usually on a scale of 1 to 5.
- Consider the fund’s expense ratio to understand the cost of investing in it.
Step 3: Once you’ve finalised the fund(s) you want to invest in, access your Angel One account, navigate to the Mutual Funds section, and locate your chosen fund. Given that this may be a long-term investment, exercise caution during this stage:
- Decide whether you prefer a lump sum investment or want to set up a monthly SIP (Systematic Investment Plan).
- Enter the desired investment amount and select your preferred payment method. UPI is the recommended mode, but you can also opt for net banking.
- If you’re opting for the SIP route, you can create a mandate for hassle-free future instalments.
By following these steps, you can make the process of investing in Dynamic Mutual Funds through your Angel One account more discreet and streamlined.
Top 5 Dynamic Mutual Funds to Invest in
| Fund Name | AUM (in ₹ crore) | 3Y CAGR % | 5Y CAGR % | Expense Ratio |
| ICICI Pru All Seasons Bond Fund | 13,409.86 | 7.66 | 8.05 | 0.59 |
| Kotak Dynamic Bond Fund | 3,022.77 | 7.06 | 7.45 | 0.58 |
| Bandhan Dynamic Bond Fund | 3,076.30 | 6.74 | 7.26 | 0.71 |
| SBI Dynamic Bond Fund | 3,324.37 | 7.49 | 7.22 | 0.62 |
| Nippon India Dynamic Bond Fund | 4,233.54 | 6.55 | 6.86 | 0.32 |
The listed top funds are for informational purposes only and not recommendations. Based on a 5-year CAGR as of January 6, 2025, these figures are subject to frequent changes. For real-time updates, visit Angel One.
ICICI Prudential All Seasons Bond Fund
The ICICI Prudential All Seasons Bond Fund is a dynamic bond fund managing ₹13,409.86 crore in assets. It has delivered a 3-year CAGR of 7.66% and a 5-year CAGR of 8.05%, with an expense ratio of 0.59%. This fund focuses on active duration management, offering flexibility to navigate changing interest rate scenarios. Managed by ICICI Prudential AMC, a leader in the mutual fund space, the fund benefits from the AMC’s strong research and investment expertise.
Kotak Dynamic Bond Fund
The scheme was launched on 26th May 2008. It is managed by Mr. Deepak Agrawal since 25th November 2012 and Mr. Abhishek Bisen since 1st November 2022. Expense structures vary across different plans.
The Kotak Dynamic Bond Fund, with ₹3,022.77 crore in AUM, provides a 3-year CAGR of 7.06% and a 5-year CAGR of 7.45%, supported by an expense ratio of 0.58%. Managed by Kotak Mahindra AMC, the fund employs dynamic strategies to maximise returns in changing interest rate environments, appealing to risk-conscious debt investors.
Bandhan Dynamic Bond Fund
With an AUM of ₹3,076.30 crore, the Bandhan Dynamic Bond Fund offers a 3-year CAGR of 6.74% and a 5-year CAGR of 7.26%. The fund has an expense ratio of 0.71%. It leverages Bandhan AMC’s expertise in managing diverse debt instruments, ensuring flexibility and potential for steady returns amid varying market conditions. The fund offers a minimum investment of ₹1,000 and SIP starting at ₹100, with no exit load since 17th October 2016.
SBI Dynamic Bond Fund
The SBI Dynamic Bond Fund, managing ₹3,324.37 crore, is tailored for investors seeking flexible debt investments. It has achieved a 3-year CAGR of 7.49% and a 5-year CAGR of 7.22%, with an expense ratio of 0.62%. Backed by SBI Mutual Fund’s extensive market experience, the fund adjusts its portfolio dynamically to align with interest rate trends, making it a reliable choice.
Nippon India Dynamic Bond Fund
The Nippon India Dynamic Bond Fund is a versatile debt fund with an AUM of ₹4,233.54 crore. Offering a 3-year CAGR of 6.55% and a 5-year CAGR of 6.86%, it has an expense ratio of 0.32%, making it a cost-effective option. As part of Nippon India Mutual Fund, known for its robust risk management, the fund provides dynamic duration strategies to optimise returns across market conditions.
Mutual Funds Calculators
Dynamic Bond Funds FAQs
Are Dynamic mutual funds risky?
Should I invest in Dynamic mutual funds?
What are the expected returns of Dynamic mutual funds?
What are the risks involved in investing in Dynamic mutual funds?
Are Dynamic mutual funds taxable?
How much money should I invest in Dynamic mutual funds?
