Dynamic Bond Funds are primarily debt mutual funds that alter the allocation of finances between short-term and long-term bonds to ensure that the financial corpse that the investor is creating is not affected by any kind of sudden market variation. Investing in this way helps the investor to take more advantage of the interest rates.
While not many investors tend to invest in debt funds, as they give fewer returns than the equity funds, debt funds are the safest bet when it comes to handling money in the falling interest rate cycle. Plus, the option of dynamic bond funds ensures that the investor is always at the receiving end.
In this article we give a few reasons why investing in dynamic bond funds is lucrative. Read on!
- Guidance of asset manager:
One of the best features of having a dynamic bond fund is guidance that the asset manager offers. As mentioned above, these funds alter the allocation of finances between short-term and long-term bonds, and the view of a manager of the interest rate becomes very important. If the Reserve Bank of India takes a contrary step to the expectation or interpretation of the fund manager, then the profit margins will be impacted significantly.
- Tax efficient:
The usual way of going about bond funds is to hold the investment for a minimum of three years lock-in period in order to receive, indexation profits on the capital gains. It is at this stage where the dynamic bond funds differ from debt funds. This shift takes place in order to make the most of the interest rate cycle which would eventually result in higher tax incidence.
- No mandate:
In a general scenario, all debt funds are bound to agree with its investment mandate. Which means, short-term bond funds must only invest in short-term securities and same goes for the long-term bond funds. However, when it comes to dynamic bond funds, this rule may not be necessarily followed as everything in these funds is directly proportional to the interest rate movement. So, investments can be done in long-term securities for even a month.
- Risks calculation:
However, just as every financial instrument, even dynamic bond funds are subject to certain market risks. But, these funds are considered to be a better investment than the short-term as they cannot use the duration strategy. But, all the profits and losses primarily depend on the fund manager. It the fund manager fails to take the right steps with the portfolio, then there are chances that the investor may suffer losses even of the previously earned profits.
Thus, while selecting a financial instrument it is crucial to analyse and understand the market trend and the how the macroeconomic factors are affecting the changes in the interest rates. In such times, the facilities and perks offered by a dynamic bond fund, aid the investor to invest better and to create a better financial corpse for themselves.