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Dynamic Bond Funds


I’ve had two questions on email recently about Dynamic Bond Funds.

The concept of Dynamic Bond Funds needs an understanding that bonds are complicated, way more than stocks. A few things that make bonds different:

a) Issuer creditworthiness: Is a government bond more likely to default, or a second rate corporate bond? Would a Reliance bond have a chance of default more than say an ICICI Bank bond? The lower the credibility the higher the interest rate one asks for.

b) Yield: How much interest will I get, on a comparative basis, for this bond versus that one?

c) Time to maturity: A lesser time to maturity usually means a lower interest rate, since the haziness about whether an issuer is creditworthy (or will not default) is lower in the short term.

d) Smaller things like “is this bond secured against the company’s assets?”, “is this bond liquid?” etc.

Dynamic bond funds are essentially those that vary the above based on the fund manager’s discretion. Usually the fund manager will go into shorter term securities in a rising interest rate cycle, or move from corporate to government bonds at a time when the economy is slowing, and so on.

Now to the questions:

What’s the difference between a Gilt Mutual Fund and Dynamic bond funds?

A Gilt fund invests in Government securities only. Within Gilt funds you have further classifications: “short term” gilt funds that invest in T-Bills (<365 days) or in 1 to 3 year govt securities. Or “long term gilt funds” that hit the higher terms.

Dynamic bond funds are supersets; they can choose to invest in gilts or in corporate bonds or commercial paper, or all of the above.

Second Q:

I typically purchase funds with valueresearch rating of 4 or 5. Hence, I have selected and started investment (redirecting new investments for fixed income and proceeds from redemption of ultra-short schemes) in L&T Flexi Debt fund – Growth (VR 5 star fund). Now I am looking at diversifying by investing in another fund of similar philosophy. I was evaluating Birla Sun Dynamic Bond, SBI Dynamic Bond, BNP Paribas Dynamic Bond (erstwhile Fortis Flexi Debt), Kotak Flexi-Debt (which is surprisingly classified in ultra-short term in VR, I think due to maturity of currently held portfolio) but could not reach a conclusion.

Can you please suggest approach for identifying such a fund? Also, can you please suggest some good ones (from them or apart from these)?

Now I don’t invest in dynamic bond funds, but I would use the following rules:

– The fund has to be at least five years old, or you should really trust the fund manager.

– Check the performance in a rising interest rate cycle, and a dropping one. For the record, here if the interest rate history in India:


– Here’s where you really need time and effort: During the periods of falling rates, you will need to go back, download the fund’s disclosure statement and see if the average maturity of their portfolio went UP or DOWN, and whether you liked their move into/out of government bonds.

– Check relative performance with other fund categories (like gilt funds, income funds or other such).

– Make sure exit loads aren’t onerous.

– Lastly, understand that the product carries risk. Bonds are not risk free.

If you can’t do the analysis, get your advisor to provide you with it. (And pay him; tell him you’ll buy the product online) If you can’t do that also, don’t buy the product. A fixed deposit at a bank also works.

Dynamic bond funds basically are like that Indian Software company that says, “Boss we do Windows, Java, Web, C++, Linux, Android, iPhone and Nokia coding, any language, any platform, anything”. There are very few companies that have successfully done all of them, so you have to analyse past performance and be able to trust the fund manager.

While I’d like to analyse the funds, I think it’s better if I let each interested person do it himself – the exercise itself provides the learning. Also because I can’t afford the time, but that’s a different matter!


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