Looking to earn some additional income in the present scenario? You can consider a dynamic bond fund in India for this purpose. Dynamic mutual funds or bond schemes have varying maturity profile and composition alike. The key objectives behind these funds are the provision of optimized returns throughout falling and rising scenarios in the market. This depends mostly on the decisions taken by the fund manager and also the management of the portfolio in turn. The funds usually come with sizable AUM (assets under management) and this in turn means a portfolio that is worth a staggering amount. There may also be pauses at times between changes/fluctuations in rates of interest. This may impact income of investors in bonds.
Hence, dynamic bond mutual funds in India are suitable options for people looking to ride out the cycles of interest rate fluctuations. Dynamic trading of instruments with varying maturity periods is done by fund managers based upon expected rate changes. For example, in a scenario where interest rates are coming down, managers will scale up holdings of the clients in long-term market instruments such as gilts. Those who are not experienced enough in decision-making based upon interest rate movements, should choose these investments. Those looking for extremely low risks with their investments should try debt fund investments instead or debt mutual funds. Of course, mutual fund performance matters greatly while choosing any fund.
People with moderate appetite for risks and a horizon of 3-5 years for investments should consider investing in such funds. SIPs will always favorably help in tackling volatility levels with aplomb. You should also note that returns from dynamic bond funds will majorly be influenced by movements of interest rates.
Key aspects of a dynamic bond fund in India
- The fund manager’s perception of interest rates is vital in this scenario.
- Factors like fiscal deficit, oil prices and new policies of the Government may impact returns from these funds. Investors should stay invested for extended durations for minimizing short-term risks.
- These funds are superior than short-term options since they cannot effectively use the duration-based strategy. Yet, if the fund manager cannot lower the portfolio as needed, the earlier profits may be impacted likewise.
- Bond fund investors should remain invested for a minimum of 3 years for getting indexation related perks upon capital gains. Dynamic bond funds will differ from other debt funds in this context.
- Prices of bonds will have inverse proportionality towards changing interest rates. If rates of interest are going up, then costs of bonds will go down and vice versa. With a continued drop in rates of interest, prices of bonds will be rallying to an extent on the basis of the remainder of maturity. Fund managers may also have medium-term and short-term corporate bonds which additional generate income from interest.
- All debt funds should be in sync with the mandate for investments. Short-term bond funds may only invest in securities for the short term and vice versa. Dynamic bond funds may invest in long-term securities for a month as well, depending upon movements of interest rates.
Dynamic bonds may swiftly switch to mid-term or short-term securities from long-term securities as well. They may help in earning additional income by smoothening out interest rate fluctuations or waves. Managers will be continually trading bonds of various maturities, depending upon their own expectations of changes in rates of interest.