Current Interest Rate Regime: Time to bet on dynamic bond funds

financialexpress.com:

As the Reserve Bank of India has kept the repo rate unchanged for the third time in a row, individuals can now look at dynamic bond funds which can offer a balance between risks and returns. These are debt funds that dynamically manage their bond duration.

The fund manager actively takes a view on the future direction of interest rates and bond yields and adjusts the duration accordingly. As bonds with higher duration react the most to changes in interest rates, when the rates are expected to go down the fund manager will shift to long duration bonds. Over a longer time frame of 4-5 years, these funds can generate better returns than other thematic debt funds.

Nehal Mota, co-founder & CEO, Finnovate, a hybrid financial fitness platform, says dynamic bond funds are not so much about timing, but they work best when the rates are expected to go down. “While the timing of the rate cuts by the RBI is uncertain, the probability of rates going down over the next one to two years is more than the probability of rates going up. Hence this can be a good time to be in dynamic bonds funds for retail investors subject to two conditions. Stick to funds with a good consistent track record of delivering returns and ensure that dynamic bond funds do not cross 20% of your debt allocation to control risks,” says Mota.

The idea of a dynamic bond fund is that the fund manager will change the portfolio characteristics as per the interest rate environment. Investors can remain invested for a longer period without worrying about the interest rate cycles.

Pankaj Pathak, fund manager, Fixed Income, Quantum AMC, says in the current environment dynamic bond funds do seem like a very good option for long-term fixed income allocation. “The interest