Last Updated on August 30, 2021 at 4:19 pm
Dynamic bonds are debt mutual funds with a flexible investment strategy. There is a perception that they funds can be used to take advantage of interest rate movements to maximise gains. Unfortunately, these funds do not reward investors enough for the effort and risk involved in its investment strategy. Which is why I believe that one should not invest in dynamic bond funds.
Investment strategy: Typically, when the interest rates are expected to fall, the fund manager will increase exposure to long-term bonds. When the interest rates are expected to increase, the fund manager will move to short-term bonds.
Such a strategy combines the two ways in which debt funds produce returns: capital gains (due to rate movements) and interest income from bonds.
A couple of days ago, I had mentioned that debt funds which invest in short-term bonds out-perform other categories including dynamic bond funds. Read that post here.
Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email! 🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥
In this post, I would like to highlight the performance of dynamic bond funds with the same data set.
Plotted below is the CAGR calculated from annual returns from Value Research versus the standard deviation of the annual returns for different durations.
CAGR is the average rate at which an investment has compounded annually – a measure of reward.
Standard deviation is the extent of deviation of each annual return from the arithmetic average – a measure of risk.
The data points represent all debt mutual funds. Dynamic bond funds are shown in red.
12-year CAGR vs. 12-year standard deviation
Only two 12 -year old dynamic bond funds. They have done better than long-term funds: typically same reward at much lower risk. However, the short-term fund have done better.
If dynamic funds had indeed played the interest rate cycle well, they should have beat the short-term fund as well.
10-year CAGR vs. 10-year standard deviation
Again the same conclusions as above.
5-year CAGR vs. 5-year standard deviation
Short-term funds have done well in the last five years when rates were high. So should have dynamic bond funds if they had had enough exposure to short-term funds. No evidence of that.
Conclusion: Stay away from dynamic bond funds. They are better than long-term funds. That is all that can be said. However, that is like saying a rock is better than a hard place!
Long-term funds are not of much use. They lose during rate hikes what they gain during rate cuts. Dynamic funds fare better because of their ‘dynamism’ but have not managed to outperform short-term funds.
As mentioned at least thrice earlier(!), investors who stick to short-term funds are more than likely to do much better.
🔥Enjoy massive discounts on our courses, robo-advisory tool and exclusive investor circle! 🔥& join our community of 5000+ users!
Use our Robo-advisory Tool for a start-to-finish financial plan! ⇐ More than 1000 investors and advisors use this!
New Tool! => Track your mutual funds and stocks investments with this Google Sheet!
- Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
- Have a question? Subscribe to our newsletter with the form below.
- Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.
Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!
Explore the site! Search among our 2000+ articles for information and insight!
About The Author
Dr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter or Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! ⇐ More than 3000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter what the market condition is!! Watch the first lecture for free! One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course! Increase your income by getting people to pay for your skills! ⇐ More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts you and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!
Our new book for kids: “Chinchu gets a superpower!” is now available!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook is for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or you buy the new Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low volatility stock screeners.
About freefincal & it's content policy. Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
- Twitter @freefincal
- Subscribe to our Youtube Videos
- Posts feed via Feedburner.
Our publications
You Can Be Rich Too with Goal-Based Investing
Published by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want
This book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.Your Ultimate Guide to Travel
This is an in-depth dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically, with links to the web pages and hand-holding at every step. Get the pdf for Rs 300 (instant download)