Dynamic Bond Funds are debt mutual funds that invest in debt and money market instruments such as corporate bonds and government securities.
These funds do not have any limitation pertaining to duration or maturity of the securities they invest in. Dynamic bond funds are usually more volatile than short duration and medium duration debt funds, however they can offer superior returns across different interest rate scenarios over sufficiently investment tenures.
Returns given by dynamic funds
As we can see in the data below, one-year return of most dynamic bond funds hovered in the range of 5-12percent per annum. Although there are more than two dozen funds in this category (as per AMFI data), we list out the ones that posted relatively good returns.
The highest one-year returns were given by UTI Dynamic Bonds i.e., 11.65 percent. It was followed by Franklin India Dynamic Accrual Fund that gave a return of 9.4 percent. Following this, HDFC Dynamic Fund and IIFL Dynamic funds gave returns of 8.75 percent and 7.35 percent, respectively.
As far as three-year returns are concerned, IIFL Dynamic Bond posted a return of 7.37 percent, followed by HDFC Dynamic Debt Fund that gave a return of 7.34. At the same time, IDBI Dynamic Bond posted a return of 6.84 percent and Franklin India Dynamic Accrual Fund gave 5.58 percent.
| Fund name | 1-year-return (%) | 3-year-return (%) |
| Franklin India Dynamic Accrual Fund | 9.40 | 5.58 |
| IDBI Dynamic Bond | 5.77 | 6.84 |
| HDFC Dynamic Debt Fund | 8.75 | 7.34 |
| IIFL Dynamic Bond | 7.35 | 7.37 |
| UTI Dynamic Bond | 11.65 | 4.69 |
(Source: AMFI, data as on March 31, 2022)
The highest returns in dynamic bond fund category were 7.6 percent. The bottom performer gave a return of -4.93 percent and the category average was -0.64 percent, as per Morning Star data.
Interest rate outlook
The duration of a dynamic bond hinges on the type of securities the fund manager invests in based on the interest rate outlook. If there are expectations of interest rates to go south, fund managers will invest in longer term (longer duration) bonds to earn profits from price appreciation.
If they expect interest rates to rise in the near future, they will invest in shorter term bonds to reduce interest rate risks and also re-invest maturity proceeds of the bonds at higher interest rates in the future.
Apart from dynamic bond fund, the other debt fund categories which investors can explore include short duration funds, banking & PSU funds, corporate bond funds and glit funds.
It is important to mention here that since interest rates are on a rise, financial advisors tell investors to look at short term deposits or mutual funds before they lock in for a longer term.