Interest rate movements: Time to bet on dynamic bond funds
Investors should actively consider dynamic bond funds, especially with the expectation of a fall in bond yields, say experts. They, however, need to have a longer holding period of atleast two to three years to ride out the intermittent volatility.
In dynamic bond funds fund managers have the flexibility to adjust the portfolio’s duration and positioning based on their predictions of interest rate movements. When interest rates start falling, bond prices rise and longer maturity bonds gain more as these are more sensitive to rate changes.
With inflation coming down and potential easing in the global monetary policy, the Reserve Bank of India might also cut interest rates in the near future. Pankaj Pathak, fund manager, Fixed Income, Quantum AMC, says dynamic bond funds are better for investors now as they have flexibility to change the portfolio positioning if things go the other way. “Bond funds with long term bond holding or higher portfolio duration should do better going forward,” he said.
In the current scenario, as fund managers anticipate rate cuts, the category has an 80% exposure to papers maturing above five years. Nirav Karkera, head, Research, Fisdom, says this strategic approach will be even more advantageous as it aims to capture capital gains resulting from the subsequent rise in bond prices. “Investors should indeed consider dynamic bond funds in the current market environment, given their potential to navigate interest rate movements and capitalise on opportunities for enhanced returns.”
To be sure, investors who were invested during the pause period after the rate hikes in 2014 experienced significant returns, with the category delivering approximately 10%, and even the best-performing fund achieving
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