Now is the time to consider dynamic bond funds?
Dynamic bond funds are a category of debt patterns that change the allocations between short and long term obligations. The strategy aims to take advantage of fluctuations in interest rates. But if the duration call goes awry, investors can suffer.
Looking at current movements in interest rates, it’s possible that inflation will rise, followed by interest rates, according to George Heber Joseph, chief investment officer and chief investment officer at ITI Mutual Fund. He sees a high likelihood of significant rate hikes within three to five years. And since lay investors lack the ability to time the movement of interest rates, he said dynamic bond funds would be the best borrowing option.
He cautions, however, that some bond funds buy suspicious and substandard credit papers. This is where a lot of chaos has happened in the industry, he said. There is also reasonable quality paper that is very illiquid, he said. A fund house should have high quality bonds in the basket. So when an opportunity presents itself to make gains or a need for liquidity arises, the fund is easily able to manage it, Joseph said.
Ladderup Wealth Managing Director Raghvendra Nath disagrees. A dynamic bond fund is intended for sophisticated investors, not for those who do not understand price risks. The expectation of an investor of a fixed income mutual fund product is that it will beat inflation by 1-2% or at least keep pace with inflation, he said. he declares. But looking at the 10-year track record of dynamic bond funds, Nath said, many programs would have returned 2-3% in bad years and 14-15% in good years, he said.
This means that the volatility is much higher for the average investor, according to Nath. Currently, the market is at the bottom of the interest rate cycle, Nath said, and he is not suggesting such programs when interest rates are only expected to rise. The returns of a dynamic bond fund will be lower than a corporate bond fund of the same duration, but with a higher yield to maturity, he said.
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