KNOWLEDGE CENTRE Debt Funds / What Are Dynamic Bond Funds?
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What Are Dynamic Bond Funds?


There are a number of mutual fund options available for investors. They offer higher returns with a low risk. Depending on one’s financial plan and investment tenure, an investor may make a decision to allocate his money in a particular fund. Due to the falling interest rate on savings account and fixed deposits, investors are on a lookout for alternative safe investment options to park their funds. However, many investors are often not aware of different types of high-return funds and end up making a decision without adequate knowledge and research.

How Do Dynamic Bond Funds Work?

Dynamic bond funds are a type of mutual fund, which invest in debt securities that vary in maturity. Every mutual fund is managed by the fund manager who invests the amount across different debt securities in order to reduce risk and achieve a higher rate of return. Dynamic Bond Funds are different from its counterpart in a way that fund managers may switch from a medium-term bond to a lower-duration bond and vice versa. There is no static duration element here. The entire movement of the fund is handled by the fund manager who takes decisions based on the rate of interest on debt securities. For instance, if the interest falls in a short-term fund, he/she may quickly move to a medium-term fund to reduce risk.

What Are The Returns Offered By Dynamic Bond Funds?

When it comes to the rate of return, dynamic bond fund returns have performed better than short-term securities, growing by around 7% to 13% in the last one year. This proves that the returns from these debt funds are much higher than fixed-income mutual funds or bank savings accounts. You may also earn through capital gain when the value of the bond increases. Most of the returns are in the form of accrual of interest only. However, it all depends on the fund managers who ought to have the relevant skill to anticipate market movements. Most fund managers prefer to invest in long-term securities that give a higher returns than short-term investments.

What Are The Taxes On Dynamic Bond Funds?

Dynamic bond funds are taxed like any other or debt investment. Returns from debt investments held for less than three years are treated as short-term capital gains and are taxed according to the investor’s tax slab after adding the gains to their income. If the investments are held for more than three years, the returns are treated as long-term capital gains and are taxed at 20 per cent with indexation benefit.

How Long Should You Invest In Dynamic Bond Funds?

The fund strives to take advantage of the rate of interest on the bond. The portfolio could consist of very short maturity securities, very long maturity securities or a mix of both. There is no cap on the tenure in the fund. It is ideal to match the fund’s average maturity with your investment goals to get higher returns.

How To Choose The Right Dynamic Bond Fund For Your Needs?

If you are planning to invest in Dynamic Bond Funds, you need to understand the risk-return balance and research about the performance of the fund in the previous one year. The timing of the investment will play a huge role. Also, mutual fund returns largely depend on the fund manager. There is a risk of active management in the funds, which need to be reduced to a minimum by choosing a seasoned fund manager, who has a thorough knowledge of the market and may help you generate higher returns on your investment. Make your choice based on the performance of the fund house and choose to invest only when you are aware of the interest rates offered by the fund.

Investors tend to choose Dynamic Bond Funds for a higher return and low risk, but there is an inherent risk present in every form of investment. Based on your financial goals and risk appetite, you may choose to invest in funds for a short period of time.

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