Dynamic bond funds are considered all-weather debt funds. If you are unsure of the interest rate movement, you can consider investing in these funds.
The financial market offers many different debt mutual funds to invest in. Depending on various factors, such as your investment objective, risk appetite and duration of investment, you can pick from different kinds of debt funds.
Usually, debt mutual funds invest in debt securities according to the duration of the underlying security. For instance, a liquid fund invests in debt securities with a maturity period of less than 91 days. Money market funds invest in debt securities with a maturity period of less than a year. A corporate bond fund could invest in company bonds that have longer maturities.
A dynamic bond fund is a debt mutual fund that is agnostic to the maturity period of securities. It may invest in very short-term securities, as well as long-term securities. This sets it apart from other debt mutual funds in the market.
The most important feature of a dynamic bond fund is that it helps manage interest rate risk. Interest rate risk is associated with the risk of bond price and yield movements if there is a change in interest rate in the market.
Interest rates and bond prices have an inverse relationship. When the interest rate in the economy rises, bond prices fall. When interest rates fall, bond prices increase. Interest rate risk is higher in longer duration bonds.
Dynamic bonds bypass interest rate risk by investing in bonds with different durations. Since there is no restriction on bond duration in dynamic bond funds, fund managers rebalance the fund depending on the interest rate outlook. For example, if a fund manager expects the interest rate cycle to fall, they can invest in bonds with longer maturities. If they think interest rates will increase, they can invest in shorter-duration bonds. This way, fund managers can effectively manage rate waves.
When to invest in dynamic bond funds?
If you are unsure of the interest rate movement and are worried about interest rate risk, you can consider buying dynamic bond funds. These funds are suitable for investors with a moderate risk appetite. So, if you believe you have a low-risk threshold, you probably shouldn’t invest in these kinds of funds. Also, the ideal investment duration for dynamic bond funds is three to five years.
Dynamic bond funds are considered promising investment avenues for those concerned about interest rate risk. If the interest rates in the economy are highly volatile, you could bet your money on these funds and expect reasonable returns. Geojit can help you find the right dynamic bond fund to invest in and also help you understand if this kind of investment is right for you.