Best Dynamic Bond Funds: Benefits, Workings And Reasons To Invest In

Mutual funds

Dynamic 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. 

How do Dynamic Bond Funds Work? 

Dynamic bond funds work by taking advantage of the duration strategy. The fund managers of these funds have the flexibility to alter the proportion of investments in various types of debt securities. The fund manager can instantly switch between short-term, mid-term and long-term securities as per the interest rate projections. 

For example, if the fund manager expects the interest rates to decrease in the future, he/she will invest in long-term bonds and expect returns from price appreciation and vice versa. They can also trade bonds of varying maturities or alter the number of holdings to reduce risks. 

Reasons to 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.

Professional Fund Management: The fund manager of dynamic bond funds is an expert when it comes to assessing fluctuating interest rates. He/she can change the asset allocations to generate maximum returns in a volatile market. 

Low-risk investments: In terms of risk, dynamic bond funds are better in comparison to other short-term funds. The fund managers of such funds have the advantage of using the duration strategy to alter the portfolio and achieve the promised returns for the investors. 

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 a 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.

*Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.

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:

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: Should You Invest In Dynamic Bond Funds?

How to Invest in Best Dynamic Bond Funds? 

One can invest in dynamic bond funds through various online investment platforms. Once you select the investment platform of your choice, here are the steps you can follow to invest in dynamic bond funds. 

Step 1: Register yourself on the investment platform by completing the KYC process and furnishing the required details such as PAN, Bank Account number, etc. 

Step 2: Select the dynamic bond fund that you wish to invest in. Try to choose a fund that is consistent with your financial goals. 

Step 3: Select the lump sum mode or a systematic investment plan (SIP) as your preferred mode of payment. 

Step 4: Click on ‘Invest’ and enter the amount. Approve the transaction to begin your investment journey. 

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.  

FAQs on Dynamic Bond Funds

Before you go…

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Disclaimer: Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.

This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.