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.
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.
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.
These open-ended debt schemes are ideal for the following group of individuals:
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.
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|
Expected return rate (p.a)
Time Period (Years)
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.
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.
In case you are planning to invest in dynamic bond funds, take the following factors into consideration:
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
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.
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.
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.
Ans: Dynamic funds are ideal for investors who want to bet on debt funds for the long run. An ideal investment horizon for such funds is 3-5 years. A long-term investment will also offer the benefit of low tax rates and a 20% indexation benefit.
Ans: The fund managers of dynamic bond funds primarily invest in debt securities that have a low credit risk. Some of the assets that these funds invest into are:
Bonds, Securities and Certificates issued by the Government
Bonds issued by Banks and Public Sector Undertakings (PSUs)
Government Issued Long term Stocks, also known as Gilts.
Want to put your savings into action and kick-start your investment journey 💸 But don’t have time to do research? Invest now with Navi Nifty 50 Index Fund, sit back, and earn from the top 50 companies.
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.
10 Best SIP Plans for 1000 Per Month in India 2023Systematic Investment Plan (SIP) is an investment style or route with which you can invest a fixed ... Read More »
How to Invest in Mutual Funds in India – Easy StepsMutual funds can be an excellent way to diversify your portfolio and gain exposure to a wide range ... Read More »
20 Best Nifty 50 Index Funds in India to Invest in April 2023What is the Nifty 50 Index Fund? Nifty 50 index funds are a type of passively-managed equi... Read More »
Asset Management Company (AMC) – Types and BenefitsWhat is an Asset Management Company (AMC)? Asset Management Company or AMC is a financial ... Read More »
10 Best Gold Mutual Funds to Invest in India (April 2023)Gold Mutual Funds are funds that invest in gold and gold-related assets such as bullion, coin... Read More »
20 Best Flexi Cap Mutual Funds to Invest in India 2023Flexi-cap funds are mutual fund schemes that aim to invest in stocks of companies across market cap... Read More »
Best SIP Plans for 15 years – Top 10 SIP Plans to Invest in India 2023A systematic investment plan (SIP) could be a convenient mode or style of investing in mutual funds... Read More »
10 Best SIP Plans for 1 year Investment in India 2023There has been a massive surge in SIP or Systematic Investment Plan investors in recent years. As p... Read More »
10 Best SIP Plan for 3 Years in India to Invest in 2023SIP or Systematic Investment Plan helps bring investment discipline in an investor’s life. It’s... Read More »
10 Best SIP Plan for 10 years India in 2023 – Returns and PerformanceAsk any beginner mutual fund investor and most of them would tell you that their preferred mode of ... Read More »