All you need to know about dynamic bond funds

Dynamic bond funds are open-ended debt schemes investing across duration.

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The dynamic bond schemes are open-ended debt schemes which follow a dynamic approach in terms of the maturity of securities in its portfolio. According to Sebi definition, dynamic bond funds are open-ended debt schemes investing across duration. These schemes have the potential to generate higher returns by shifting duration on the basis of market scenarios. However, if the duration call by the fund manager goes wrong, the schemes may suffer.

Bond funds are impacted by interest rates in the market. When the rates go down, long duration bond funds are rewarded the most. However, in a higher interest rate scenario the long duration funds lose out badly. Dynamic bond funds are thus considered a good way of tiding over such volatility in the bond market because of their flexibility to switch to short term securities.

The fund manager’s role in these schemes is very crucial. The fund manager’s view of interest rate can lead to good returns in these schemes, but if the call goes wrong, investors can lose money.. “That is the risk in dynamic bond funds. It is not always that the trend in rates is visible. Sometimes the rates go up or down very sharply and in those cases dynamic bond funds might get hit badly. Because you are essentially playing on a fund manager’s skills,” says Punet Oberoi, Founder, Excellent Investment Advisors.


Dynamic bond funds are meant for investors who want to participate in the bond market rallies but don’t want to take calls on the interest rates. “Investors who want to stay safe and settle for lower returns can stick to short duration funds. Long duration can give you good returns but they are volatile. If you want to bet on the fund manager to get the taste of both these segments with some risk, you can invest in dynamic bond funds,” says Puneet Oberoi. However, these schemes are meant for moderate risk-takers and not conservative investors, he adds.

Investments in these schemes held for at least three years qualify for long term capital tax of 20 per cent with indexation benefit. If you redeem within three years from the date of purchase, short-term capital gains would be added to the income and taxed as per the income tax slab applicable to you.

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