Are dynamic bond funds a good option for investors with a time horizon of over five years?
Well, I'd say, on paper, they look like a very promising fund category. They have a very unconstrained investment mandate, which is really the essence of investing in a mutual fund. Like in the equity segment, where multi-cap funds are the most preferred way of investing and should be at the core of one's investment portfolio simply because of their unconstrained mandate. Likewise, dynamic bond funds are their counterparts on the fixed-income side.
But the practical experience and performance track record reveal a slightly different picture. A lot of these funds manage their average maturities in a very opportunistic way. What I mean by that is that they invest in bonds with longer or shorter maturity and dynamically move around based on their interest-rate outlook.
We believe it is fairly hard to get your call on interest rates right all the time and as I said, the performance history suggests our belief is not wrong. If we compare the performance records of a category like short-duration funds with that of dynamic bond funds, we see that short-duration funds have been able to deliver somewhat similar returns with far less degree of volatility. Now, isn't that what a fixed-income investor needs - returns with lesser ups and downs? That's why we believe that short-duration funds trump over dynamic bond funds for one's core holdings.