Uncertain interest rate scenario makes them favourites with investors
The assets under management (AUM) of several dynamic bond schemes have grown exponentially in the past one year as an uncertain interest rate environment has prompted investors to put money in these schemes.
Assets of schemes such as DSP BlackRock Strategic Bd Reg Gr, HSBC Flex Debt Retl Gr, IDFC Dynamic Bond A Gr and Reliance Dynamic Bond Gr have posted growth of anywhere between 150% and 1,493% in the period between June 2011 and June 2012.
Birla Sun Life Dynamic Bond fund, the largest dynamic bond fund, has seen its assets rise 360% over the past year to R8,658 crore for quarter ended June 2012. SBI Dynamic Bond fund has seen its assets rise 10 times from R17 crore to about R1,700 crore in the past year. HDFC Medium Term Opportunities Gr?s fund size grew a mammoth 98,084% in the said period.
Overall, the assets of a total of 17 dynamic bond schemes grew 288% to R15,852 crore during the above-mentioned period, data collated from Morningstar India show. Interestingly, The AUM of dynamic bonds had declined from R11,200 crore in June 2010 to R4,000 crore in June 2011 as investors shifted their attention to high-yielding fixed maturity plans.
The past year witnessed a fair amount of uncertainty with regard to inflation, currency movements and the global economy, which made it difficult to predict the action of the RBI with the respect to key interest rates. It was this uncertainty that prompted investors to flock to dynamic bond funds, say market observers. ?In a dynamic bond fund, the fund manager can be more active on different segments of the interest rate curve. For instance, if he thinks the interest rates will move down, he can increase the duration of the fund and get a higher capital appreciation,? said Dwijendra Srivastava, head, fixed income, Sundaram MF.
Six of the 17 dynamic bond schemes under consideration have posted double-digit returns over the past year, with a peer group average of 9.55%. ?The good performance of these dynamic bond funds has been helped by the active duration management of these funds and their ability to quickly reposition their maturity profile to suit the changing interest rate environment,? said Dhruva Chatterji, senior research analyst, Morningstar India.
According to market observers, dynamic bond funds are ideal for those who wish to invest in bond funds, but do not want to time the markets or take a call on interest rate movements. The advantage with dynamic bond funds is that the fund manager has the flexibility to move into short-term instruments, such as Commercial Papers (CPs) and Certificate of Deposits (CDs), or long-term instruments, such as corporate bonds and gilt securities, depending on his outlook on interest rates.
However, investing in these funds is not without risks. The biggest risk, according to experts, is that the fund manager?s call on interest rate movement could go wrong. In the past year, seven of the 17 dynamic bond funds under consideration have given negative returns.