The performance of debt funds varies with the changing interest rates. If the interest rates are rising, then the debt funds experience a drop in returns. Conversely, in a falling interest rate cycle, the debt fund earns good returns. Dynamic Mutual Funds benefit from both rising and falling interest-rate cycles by altering their portfolio allocations between long-term and short-term bonds. This allows the fund to offer steady returns regardless of the interest rate cycle.
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Dynamic Mutual Funds have a ‘dynamic' maturity as well as composition. These funds have an investment objective of delivering optimum returns in falling as well as rising market cycles. The fund manager of a dynamic debt fund manages the portfolio dynamically with respect to the changes in the interest rates.
Talking about interest rates, it is important to note that there can be pauses between interest rate changes. These pauses can affect the returns on bonds, too. Hence, Dynamic Mutual Funds are a good option for investors who want to generate returns from their bond investments regardless of the interest rates.
The main characteristics of dynamic mutual funds are:
a) Professional Management
Dynamic bond fund managers are professionals in their area. In a changing economic climate, they use their specific expertise to achieve optimal returns.
b) Liquidity
Investors can redeem their units in dynamic bond funds within two working days of submitting a redemption request to the asset management company (AMC). Furthermore, fund houses do not impose an exit load when a fund is redeemed.
c) Tax Efficiency
Individuals who invest in debt mutual funds for at least three years can benefit from the reduced tax rates linked with them. Dynamic bond funds are taxed in the same way as other debt funds are. Short-term capital gains are taxed in accordance with the applicable tax slab. Long-term capital gains will be taxed at a fixed 20% rate with indexation benefits.
d) Low Risks
Dynamic bond funds are low to moderate-risk investments. These funds outperform other short-term funds in terms of returns because the fund management makes the most of the duration approach. The fund manager provides maximum returns on low-risk assets by adjusting the portfolio in response to market interest rates.
The important feature of a dynamic fund is that it switches between short-term and long-term securities in time. So, if the fund manager feels that the interest rates are about to drop, he switches to long-term bonds. On the other hand, if he feels that the interest rates have reached the lowest peak and will only rise from here, he safeguards his losses from long-term bonds by switching to short-term bonds. This helps iron out the creases caused by abrupt interest rate changes.
Further, the fund manager of a dynamic debt fund also invests in gilts or corporate bonds depending on his expectation of the interest rate change.
You can invest in these funds through the Groww application or directly via the AMC’s portal.
You can invest in dynamic bond funds using a lump amount or a systematic investment plan (SIP). The lump-sum option allows investors to deploy all the available cash at once.
The main reasons or benefits of investing in these funds are:
Active Investment: These funds can be a good choice for debt investors seeking more active investment options. These funds consist of both short and long-term debt securities in their portfolios. However, it is significant to note that the returns may be more variable for shorter periods. But they perform well when the interest rates are falling.
Less Volatility: When compared to long-term debt funds, these are less volatile.
Dynamic bond funds have the same tax implications as any other sort of debt mutual fund. If investors exit the scheme within three years of acquisition, the returns are referred to as Short-Term Capital Gains (STCG). These gains are taxed based on the investor's income tax bracket.
However, if an individual redeems the units after three years, the realized returns (Long-Term Capital Gains) are taxed at a rate of 20%. It should be noted that eligible investors will receive indexation benefits on their capital gains.
Q1. What is dynamic mutual funds meaning?
A dynamic bond fund is an open-ended debt mutual fund that invests in debt assets or securities with varying maturities.
Q2. For whom is the dynamic fund suitable?
Investing in dynamic bond funds is best suited to investors with a moderate risk tolerance.
Q3. What is the risk of dynamic bond funds?
The returns on dynamic bond funds are primarily determined by the country's interest rate movement, therefore, interest rate risks are present.
Q4. What does a dynamic bond fund's yield to maturity mean?
Yield to Maturity (YTM) refers to the total projected return on debt/fixed income instruments if held until maturity. In other words, yield to maturity is the internal rate of return on a debt instrument held by the investor until maturity.
Q5. Is there a lock-in period with dynamic bond funds?
No, there is no lock-in period with dynamic bond funds. You can redeem your units at any time. Simply notify the fund house and follow the relevant procedures to opt out of the scheme.
Disclaimer - Mutual Fund investments are subject to market risks; read all scheme-related documents carefully.
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