These funds aim to provide optimal returns in market scenarios of both rising and falling interest rates, by active management of the portfolio
Dynamic bond funds, which are considered to be a safer bet in the volatile bond markets, have delivered negative returns in the last 3 months.
According to data on returns maintained by mutual fund research firm Value Research, the dynamic bond fund category has delivered a return of negative 1.23 percent in the three months ended March 5.
These funds have not added value to the fixed income portfolios of investors in addressing volatile or adverse bond market conditions. In the last one month, this category delivered a mere 0.02 percent. Dynamic bond funds generated double-digit returns in 2016 due to falling interest rates.
Generally, dynamic bond funds are for investors who do not want to take a call on interest rate movements. Fund managers in these schemes have the freedom to change the portfolio in line with market movements.
These funds aim to provide optimal returns in market scenarios of both rising and falling interest rates, by active management of the portfolio.
Mutual funds managers blamed sharp rise in bond yields for negative returns on dynamic bond funds.
“Yields have gone up in the recent times and that is reflecting in returns. Secondly, the pace of rise in bond yields was also quite sharp. Usually dynamic bond funds invest in long term bonds,” said Mahendra Jajoo, Head-Fixed Income, Mirae Asset Mutual Fund.
Dynamic bond funds gave lower returns as most fund managers were sitting on long duration securities when interest rates spiked up surprisingly.
Benchmark 10-year bond yields, which went all the way down to 6.2 percent post demonetisation, reversed course in the face of rising oil prices, threat of slippage in fiscal deficit and expected oversupply in bond markets owing to the announcement of the issuance of Rs 1.35 lakh crore bank recapitalisation bonds. Yields went through the roof and touched 7.5 percent.
India’s benchmark 10-year yield surged to 7.82 percent last week, the highest since February 2016.
A quick analysis of the returns on dynamic bond funds of some of the fund houses paints a bleak picture. Returns have largely mirrored that of long duration funds, with returns in the range of 1-2 percent, though a few funds have done better.
But not a single dynamic bond fund’s return came anywhere near the liquid fund yield of about 6.5 percent from its own fund house.
Among the top 3 performers, ICICI Prudential Dynamic Bond Fund delivered return of 0.5 percent, Tata Dynamic Bond Fund returned 0.62 percent, and IIFL Dynamic Bond Fund offered a return of 0.68 percent during the period under review.Mutual funds advisors recommend investors to stay away from dynamic bonds as they will continue to underperform. Also, many experts are expecting the Reserve Bank of India to increase rates soon, which is likely to hurt dynamic bond funds.