Are dynamic bond funds worth the hype?

Ever since interest rates started undergoing a revision earlier this year, dynamic bond funds have become the talk of the town, with several fund managers joining the growing chorus in the last few months. However, at Value Research, we still prefer the no-fuss short-duration funds and generally remain wary of dynamic-bond funds. And we have fairly valid reasons for that. But before we get to the why, let's understand what dynamic bond-funds are. How dynamic bond funds work Dynamic bond funds have no investment constraints, meaning they can invest in both long- and short-term bonds to take advantage of interest rate cycles. While in theory, this makes them an optimum all-weather option for debt investors, there is a catch. Here's why you should consider short-duration funds over dynamic funds: Returns Dynamic funds have delivered similar returns compared to short-duration funds. In addition, they have also been more volatile. Look at the one-year and five-year average rolling returns graphs. If we see the average one-year rolling returns of dynamic-bond funds over the last 10 years, they have moved from as high as 15 per cent to as low as one per cent. On the other hand, short-duration funds have been relatively consistent, ranging from 3 to 11 per cent, despite having fewer i