As bond yields remain elevated, individuals should consider investing in dynamic bond funds. These funds adjust the duration and credit exposure according to the evolving conditions which helps to navigate market uncertainty.
Dynamic bond funds offer a balance between risks and returns. Fund managers dynamically manage their bond duration. When yields are rising and the outlook remains uncertain, it becomes extremely difficult to accurately time interest rate movements. This is where dynamic bond funds become relevant for investors.
Mayur Chauhan, fund manager, Fixed Income, Quantum AMC, says these funds are actively managed, allowing portfolio managers to adjust duration in response to evolving market conditions. “Additionally, a focus on high-quality credit instruments during uncertain periods helps maintain stability,” he says.
Higher returns
Over a longer time frame of three to five years, these funds can generate better returns than other thematic debt funds. Investors can remain invested for a longer period without worrying about the interest rate cycles. They should stick to funds with a consistent track record of delivering returns.
Investors must look at the fund managers’ track record as dynamic bond funds are all about their discretion to allocate duration based on outlook on interest rates. Investors should keep in mind the credit and liquidity risks and understand what is the lowest credit quality the fund manager is allowed to go down to.
Fixed income strategy
The spike in bond yields is partly a function of transient liquidity tightness and some macro overhang, not a structural repricing of India’s credit fundamentals. “Repositioning toward high-quality accrual strategies that deliver steady, predictable carry income makes a lot of sense here,” says Nirav Karkera, head, Research, Fisdom.
During periods of uncertainty, markets tend to overshoot fundamentals, and volatility remains elevated, particularly across bond market and currency. The strategy right now should be to build in layers.
Investors should maintain a low-duration portfolio now which will help to reduce sensitivity to sudden yield jumps. They should allocate to high-quality credit paper, which will offer a buffer.
Nikhil Aggarwal, founder and group CEO, Grip Invest, says investors should keep short-duration allocations intact for liquidity and begin adding to medium-duration quality paper where yields are attractive. “For those with a three-year-plus horizon, this is one of the better entry points we have seen in recent memory,” he says.
In volatile times, for investors already carrying an overweight to long-duration funds, the right approach will be a gradual and structured trimming of that exposure. This is not a phase to chase returns, but rather to focus on capital preservation while gradually positioning for opportunities as and when they arise. Timely rebalancing is critical for a well-managed fixed income portfolio.