Best Dynamic Bond Funds: Types, Taxation & Things To Consider
Lump Sum Investment In Mutual Funds: Benefits And Things To Consider Before Investing
3 January 2022
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3 January 2022Dynamic bond funds fall under the category of debt mutual funds. These mutual fund schemes invest in debt securities of different durations. Compared to other different debt funds, the portfolio of dynamic bond funds is quite flexible. The fund manager plays a crucial role in the overall performance of these funds; any wrong call can affect the fund’s performance and make the investor lose money.
In this article, you will find an insight into these open-ended debt mutual funds, including their benefits, taxation, and so on. First, let’s start with some of the best dynamic bond funds that are worth investing in.
Table of contents
Top Dynamic Bond Funds in India
Find the tabular representation of the top dynamic bond funds in the country based on 5-year returns below:
| Name of the Scheme | 5-year Returns |
| Kotak Dynamic Bond Fund – Direct Plan-Growth | 8.49% as of December 16 2021 |
| ICICI Prudential All Seasons Bond Fund – Direct Plan-Growth | 8.27% as of December 16 2021 |
| Axis Dynamic Bond Fund – Direct Plan-Growth | 8.05% as of December 16 2021 |
| IDFC Dynamic Bond Fund – Direct Plan-Growth | 7.98% as of December 16 2021 |
| Franklin India Dynamic Accrual Fund – Direct-Growth | 7.96% as of December 16 2021 |
| PGIM India Dynamic Bond Fund – Direct Plan-Growth | 7.72% as of December 16 2021 |
| SBI Dynamic Bond Fund – Direct Plan-Growth | 7.51% as of December 16 2021 |
| IIFL Dynamic Bond Fund – Direct Plan-Growth | 7.47% as of December 16 2021 |
| DSP Strategic Bond Fund – Direct Plan-Growth | 7.18% as of December 16 2021 |
| JM Dynamic Debt Fund – (Direct) – Growth | 6.97% as of December 16 2021 |
Why Should You Invest in Dynamic Bond Funds?
Here are the reasons why one should invest in dynamic bond funds:
Dynamic asset allocation
This type of debt fund comes with the flexibility to invest in securities of different durations. In order to make the most of interest rate fluctuations, the fund manager can dynamically alter the allocation to short term, long-term and mid-term debt instruments.
Because of this dynamic asset allocation, these funds benefit from interest movements generating higher returns for investors. When the interest rates are falling, they can invest in short-term and long-term securities when the interest rates go up.
No Debt Fund mandate
Unlike other debt funds, dynamic debt funds generally do not adhere to any investment mandate. Since these have no restrictions associated with them, the investment can be made in any debt securities according to the interest rate movement.
Tax efficiency
Investments in dynamic bond funds should ideally be for a span of 3 to 5 years. You can reap the benefits of the taxation of these funds if you invest for 3 years. Generally, these are taxed at 20% with indexation benefit, which benefits investors falling under higher income tax brackets.
Who Should Invest in Dynamic Bond Funds?
These open-ended debt schemes are ideal for the following group of individuals:
- Investors with moderate risk appetite
- Those who want optimal returns across different interest rate scenarios
- Those who are ready to remain invested in minimum duration of 3 years
- Investors willing to take part in rallies in the bond market yet want to avoid taking calls on interest rates
If you fall under that group where individuals are reluctant to take risks, you may consider other kinds of debt funds like Navi Ultra Short-Term Fund, Navi Liquid Fund, etc. You can start investing in the Navi Nifty 50 and other Navi Mutual Funds through Zerodha, Paytm Money and Groww, to name a few.
Taxation of Dynamic Bond Funds
Like any other debt fund, the capital gains from dynamic bond funds are also subject to taxation. Short-term capital gains (STCG) are generally added to an investor’s overall income and taxed according to the income tax slab rate they fall under.
Long term capital gains are taxable at 20%, along with indexation benefits. Note that one needs to remain invested for at least three years to get this facility.
A 10% TDS (Tax Deducted at Source) is also applicable for income received from dividends of debt funds.
Also Read – 8 FMCG Mutual Funds To Consider In India In 2021
Things to Consider Before Investing in Dynamic Bond Funds
In case you are planning to invest in dynamic bond funds, take the following factors into consideration:
Macroeconomics factors
Changes in Government policies, fiscal deficit, oil and gas prices, etc., are some macroeconomic factors that have a visible impact on the returns and interest rates of bonds
Risk appetite
Like other debt instruments, these mutual funds also possess a certain amount of risk. The risk-bearing capacity is not the same for all investors; some have a high-risk appetite. It is advisable for them not to opt for dynamic bond funds if they are looking for high returns.
Fund’s previous performance
Any fund’s past performance provides a clear idea if the fund manager was able to achieve the goals they set before investing. Even though it is still difficult to have a preconceived opinion regarding a scheme’s future performance, it is still advisable to assess at least 5 years of a fund’s past performance.
Furthermore, the experience of the fund manager, expense ratio or the yearly fee imposed on investors by asset management companies, investment objective, etc., are additional factors you should consider.
Also Read – Which Are the Best Debt Funds In India Right Now?
Final Word
Individuals planning their long-term financial requirements can consider investing in dynamic bond funds as these have the potential to offer higher returns in the long run. However, there are some kinds of credit risks associated with this since these are subject to the fund manager’s outlook on the market and interest rates. Check if the scheme’s objectives match your financial goals and investment horizon before opting for it.
Frequently Asked Questions
Ans: No, tax exemptions under Section 80C of the Income Tax Act, 1961 are not available for investors earning returns on investments in dynamic bond funds. However, in the case of long-term capital gains, they will be able to avail indexation benefits.
Ans: For a direct plan, there is no intermediary involved as it is offered by a fund house directly to investors. While a regular plan has a third-party involvement, the intermediary receives a commission from the asset management company.
Ans: No, these open-ended debt schemes do not come with a lock-in period. One can redeem the units anytime by simply placing a request with the fund house and following basic procedures.
Ans: No, a corporate bond fund invests above 80% of its assets in corporate bonds. These generate returns by using the credit opportunities of the corporate debt papers. On the other hand, dynamic bond funds earn optimal returns by taking advantage of the interest rate fluctuations.
Ans: NAV or Net Asset Value signifies the performance of a specific mutual fund scheme that varies on day to day basis. In other words, it can be denoted as the market value of the securities that a particular scheme possesses.
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Disclaimer: Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.
