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Best Dynamic Bond Funds in India : Invest in Top 10 Dynamic Bond Funds of 2022

Updated on: Mar 17th, 2023


11 min read

Best Dynamic bond funds are a class of mutual funds whose portfolio is dynamically managed depending on the market and economic conditions to provide investors with the best returns.

1. Introduction to Best Dynamic Bond Funds

Dynamic bond funds are a type of debt mutual funds that invest in bonds with different maturity periods. The maturity of these funds is modified on the basis of the market conditions in order to reap the best returns. These funds are suitable for those investors who are willing to stay invested for a long period of time and are not ready to assume higher levels of risk. The fund managers of dynamic bond funds alter the portfolio of these funds by reducing the exposure to bonds that are not performing as expected to and increase the exposure to those that are doing well. These funds invest up to 65% of their portfolio in equities while the debt composure is restricted to under 35%.

3. Who Should Invest in Dynamic Bond Funds?

Investing in dynamic bond funds is suitable for those investors that look at benefiting from the changing economic and market conditions. As these mutual funds invest in several asset classes, you get the benefit of diversification. Dynamic bond funds are suitable for those with an investment horizon of at least three years. Investing in these funds is suitable for novice investors. These funds give them a glimpse of what both equity and debt funds are capable of. Like any other investment option, even dynamic bond funds are not absolutely safe. A dynamic bond fund carries moderate levels of risk. You may get started with a monthly SIP.

4. Taxability of Dynamic Bond Funds

As dynamic bond funds are a class of debt funds, they are essentially taxed like any other debt fund. The dividend offered by these funds are added to your overall income and taxed as per the tax slab rate you fall under. This is known as the classical way of taxing dividends in the hands of investors. Capital gains realised on selling the units of these funds within a holding period of three years are termed short-term capital gains. These gains are added to your overall income and taxed at the slab rate you fall under. Long-term capital gains are realised on selling your fund units after a holding period of three years. These gains are taxed at 20% after indexation.

5. Risks Associated With Dynamic Bond Funds

Dynamic bond funds carry higher levels of risk than liquid and overnight funds. This is because the fund manager modified the asset allocation of the portfolio depending on the prevalent economic and market conditions, and the moves made by the fund manager may not always work in the favor of investors. The debt assets of dynamic bond funds carry credit risk and liquidity risk. Credit risk is the possibility of the issuers of the securities not standing by their obligations of paying interest (coupon) and repaying the principal invested at maturity. Liquidity risk is the possibility of the fund manager being unable to sell the underlying assets without taking a significant hit. The equity-linked assets of the dynamic bond funds are affected by market volatility, market risk and concentration risk.

6. Things an Investor Should Consider While Investing in Dynamic Bond Funds

The following are some of the things an investor should consider while investing in dynamic bond funds:

  • Ensure to choose a fund which has performed well over a period.
  • Check for the performance of the fund when the interest rates were on the higher side over the last few years.
  • You may consider investing in dynamic bond funds only if your investment horizon is longer than three years.
  • Investing in the NFO of a dynamic bond fund may not be suitable if your risk-taking ability is on the conservative side. This is because there is no data available on how the fund has performed in the past.

7. Advantages of Dynamic Bonds Funds

The following are some of the advantages of investing in a dynamic bond fund:

  • Investing in dynamic bond funds is an excellent way of planning your long-term financial requirements as these funds are known to provide higher returns in the long run.
  • By investing in a dynamic bond fund, you gain exposure to a well-diversified portfolio constituted by both and debt securities.
  • The fund manager of a dynamic bond fund will continually be in the pursuit of a situation that allows him to take advantage of the changing interest rates.

Quick Summary

Dynamic bond funds are managed based on market conditions for better returns. Investors benefit from changing economic conditions. They offer diversification and suit long-term investors. Different taxations on dividends and capital gains. Risks: credit, liquidity, market. Investors should consider past performance and investment horizon. Advantages include higher returns and exposure to diversified portfolio.

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