Dynamic bond funds are enjoying their spot under the sun. At least 13 dynamic bond funds have managed to offer a respectable double-digit returns of over 10% in the last one year. Sure, the easy money policy of RBI has undoubtedly helped the performance. However, the category managed to hold on its own in a challenging year for the entire debt mutual fund category.
The debt mutual fund category has been going through trying times in the last two years. Starting with the IL&FS fiasco, the bond market space has been rocked by a series of downgrades and defaults. Several schemes across categories bear the brunt of the poor sentiment in the bond market. Franklin Templeton Mutual Fund‘s decision to shut down six of its debt mutual fund was the last straw. The decision hit investors confidence very hard.
We are also forced to drop Franklin Dynamic Accrual Fund from our recommendation list. Investors will have to wait for the ongoing court cases to get a clarity on when they would get their money back. As per the original plan, Franklin Templeton Mutual fund was supposed to hold an e-voting on June 9 to get investors’ approval for its decision to wind up the schemes. The fund house put the process on hold after the court stayed it.
Dynamic bond schemes are meant for debt mutual fund investors who do not want to take calls on the interest rate movements in the near term. Interest rate changes have a significant impact on debt mutual funds, especially long-term debt schemes and gilt schemes. In other words, bonds with longer tenure gets badly hit when the interest rates move up. They also benefit the most when the interest rates are falling like the current scenario.
Many regular investors find it hard to guess interest rate movements and time their entry and exit in debt mutual funds. They can leave this task to the fund manager in a dynamic bond funds. The fund manager has the freedom to invest across securities and tenures based on his interest rate outlook.
However, this doesn’t mean that these schemes are sure bets. If the fund manager takes a wrong call, the schemes may be hit badly. For example, there have been instances when dynamic fund managers failed to anticipate RBI move and their schemes bled heavily. Dynamic bond funds were hit badly last year because of the uncertainties in the money market and absence of firm cues about the interest rate movements. However, the category has stabilised lately.
Finally, if you want to leave the job of taking calls on interest rates and duration in your portfolio to a fund manager, you can consider investing in these dynamic bond funds.
Best dynamic bond funds to invest in 2020
- Kotak Dynamic Bond Fund
- ICICI Prudential All Seasons Bond Fund
ETMutualFunds.com has employed the following parameters for shortlisting the debt mutual fund schemes.
1. Mean rolling returns: Rolled daily for the last three years.
2. Consistency in the last three years: Hurst Exponent, H is used for computing the consistency of a fund. The H exponent is a measure of randomness of NAV series of a fund. Funds with high H tend to exhibit low volatility compared to funds with low H.
i)When H = 0.5, the series of return is said to be a geometric Brownian time series. These type of time series is difficult to forecast.
ii)When H <0.5, the series is said to be mean reverting.
iii)When H>0.5, the series is said to be persistent. The larger the value of H, the stronger is the trend of the series
3. Downside risk: We have considered only the negative returns given by the mutual fund scheme for this measure.
X =Returns below zero
Y = Sum of all squares of X
Z = Y/number of days taken for computing the ratio
Downside risk = Square root of Z
4. Outperformance: Fund Return – Benchmark return. Rolling returns rolled daily is used for computing the return of the fund and the benchmark and subsequently the Active return of the fund.
Asset size: For Debt funds, the threshold asset size is Rs 50 crore
(Disclaimer: past performance is no guarantee for future performance.)