Dynamic bond fund assets rise 400% in ’12 on rate uncertainty

Jan 19 2013, 02:06 IST
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SummaryAssets of several dynamic bond funds ballooned in calendar year 2012 as an uncertain interest rate environment prompted investors to put money in these schemes.

Assets of several dynamic bond funds ballooned in calendar year 2012 as an uncertain interest rate environment prompted investors to put money in these schemes.

As a category, the assets under management (AUM) of these funds grew about 400% between December 2011 and November 2012. Birla Sun Life Dynamic Bond Retl Gr, the largest dynamic bond fund in terms of assets, saw its AUM rise 310% in the period to R14,744 crore. Assets of HDFC Medium Term Opp Gr rose from a little over R80.8 lakh in December 2011 to over R1,658 crore in November 2012, growing more than 200,000% in the process.

Assets of ICICI Pru Income Opps Gr, IDFC Dynamic Bond A Gr, Reliance Dynamic Bond Gr and SBI Dynamic Bond Gr funds grew more than 1,000% in the period. However, Taurus Dynamic Income Gr (-56%), UTI Dynamic Bond Gr (-35%), Canara Robeco Dynamic Bd Reg Gr (-27%) and Sundaram Flexible Flex Inc Gr (-2.5%) saw a decline in their assets in the period.

Inflationary pressure and volatile currency movements in 2012 made it difficult for the RBI to take a call on key interest rates. And it was this uncertainty that prompted investors to flock to dynamic bond funds, said market observers. “The uncertainty surrounding the interest rate environment drove investors to these funds,” said Dhruva Chatterji, senior research analyst, Morningstar India.

As a category, dynamic bond funds have given average returns of 10.25% in 2012 compared with returns of 8.6% in calendar year 2011. The funds have outperformed all categories of debt funds, except Gilt Medium & Long Term, which gave returns of 10.5% in 2012.

“These funds were quickly able to change their maturity profiles to suit the interest rate environment because of the active fund management style of these funds. A lot of these funds increased their maturity profiles in 2012 to capture the fall in bond yields, anticipating a fall in interest rates,” said Chatterji. Long-term bonds tend to outperform if yields fall.

Dynamic bond funds are ideal for those who wish to invest in bond funds, but don’t want to time the markets. The advantage with dynamic bond funds is that the fund manager has the flexibility to move into short-term instruments, such as Commercial Papers and Certificate of Deposits, or long-term instruments like corporate bonds and gilt securities.

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