Dynamic bond funds see six-fold jump in net inflows at over Rs 2,000 cr

Experts attribute renewed interest to robust returns, flexibility to curb downside

Dynamic bond funds, a debt category, largely shunned by mutual fund (MF) investors, saw a sharp revival in flows in July. The category saw a sixfold jump in net inflows to over Rs 2,000 crore —the highest collection since April 2019 when category-wise break-up of flows was first disclosed. 

The last 12-month average flow for the category has been negative, at Rs 2,193 crore.

Experts say investors are opting for these funds because of robust returns, which has come on the back of a favourable duration play as yields in the bond markets have softened.

“Investors are looking at two things right now — safety and returns. They have seen double-digit returns in gilt funds and a clutch of dynamic bond funds, which has been a lure for most investors,” said Vidya Bala, co-founder of primeinvestor.in.

“There is also a perception among investors that dynamic bond funds largely use G-Secs. So, there is a perception of safety,” Bala said.  

Ten funds within the category have given between 10 per cent and 15 per cent returns in a one-year period.

Since February 2019, the Reserve Bank of India (RBI) has cut repo rate by 250 basis points (bps), from 6.5 per cent to 4 per cent. Since then, domestic yields on 10-year G-Secs have dipped 152 bps to 5.85 per cent.

 

 

Experts say investors are also looking at this category as such funds can help mitigate the mark-to-market impact if policy rates and yields start to see an upturn.

“Rates are extremely low. After the pause by the RBI, we saw some bit of hardening of rates. If rates were to take an upward turn, dynamic bond funds can handle the impact better as they have flexibility within the scheme mandate to manage duration,” said Amol Joshi, founder of Plan Rupee Investment Services.

When yields and policy rates start to move up, long-duration debt papers typically see a greater mark-to-market impact as these are relatively sensitive to yield fluctuations and changes in interest rates.

However, dynamic bond funds allow the fund manager the flexibility to re-position the portfolio to shorter-duration papers.

Experts say fund managers’ timing is critical in curbing downside risks in such funds. “If the portfolio has high exposure to long-duration G-Secs, the money manager should be nimble-footed to make changes before yields start to harden,” said a debt fund manager.  

“However, they can be considered as an alternative to gilt funds, which are required by their scheme mandate to stay put in long-duration G-Secs, regardless of the interest rate scenario likely to play out,” he added.

A gilt fund is required to maintain at least 80 per cent of its corpus in G-Secs.

The dynamic bond fund category remains among the smaller ones within the fixed-income product basket as the category is yet to find steady traction among MF investors.

At little over Rs 19,000 crore of net average assets under management, the category is smaller than credit risk funds (Rs 29,252 crore) and medium-duration funds (Rs 20,969.63 crore), which have seen large quantum of outflows following Franklin Templeton MF’s wind-up move in April.
 

MF advisors say investors need to be wary of the portfolio construction in such schemes, as the categorisation norms do not explicitly bar fund managers from taking credit risks in such schemes.