Invest in Dynamic Bond Funds to Navigate Impact of Interest Rate Cycle

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When investing, it is always advisable to invest in a mix of equities, debt, gold, and other instruments, as per an individual financial goals, investment horizon and risk tolerance. For the purpose of debt allocation, investors have a variety of debt mutual fund offerings they can choose from. However, the one aspect that investors should always look for in any debt investment is liquidity, safety and then returns. Getting this right is of paramount importance.  

Understanding Debt Fund  

Typically, debt mutual funds invest in fixed-interest generating securities such as corporate bonds, government securities, treasury bills, commercial paper, and other money market instruments. Investments made in fixed-income bearing securities which have fixed maturity periods and rate of interest, typically tend to be immune to market volatility. Hence, investing in such securities along with equity mutual funds ensure that a balance between risk-return in the portfolio is maintained at all times.  

Compared to traditional investment options, debt mutual funds offer twin benefits – easy liquidity and tax efficiency. Unlike traditional investment options there is no lock-in in a debt mutual fund. Here, investors have the flexibility to redeem their investments where never required. In terms of taxation, if a debt investment is held for more than three years, then long-term capital gain tax is at 20% with indexation benefit. In case if the holding period is less than three years, then the tax applicable is as per the individual’s tax bracket.  

Options Available  

Given the various options available among the debt funds, it is very natural for an investor to wonder which among these funds would be suitable for him from a long term perspective. In such a scenario, if an investor is ready to stay invested for the long term, then he can consider investing in a dynamic bond fund. As the name suggest, in this fund the fund manager has the flexibility to invest across corporate bonds, government securities and can invest across maturities which is of great advantage. This is of importance because the fund manager here has the ability to shape up the portfolio in line with the changing interest rate scenarios.  

Given the economic growth and inflation concerns around the world there is a cloud of uncertainty on the pace of rate hikes the global central banks may undertake. Also, it remains to be seen hoe economies react to these developments. In effect, there is a fair amount of uncertainty on how interest rates may pan out. Investing in such a situation calls for prudence. However, it is very challenging for a lay man to keep track of all these developments and react accordingly. In such a scenario too dynamic bonds emerge as a suitable investment option to tide over near term uncertainty any interest rate volatility.  

Exploring Dynamic Bond Fund 

There are several offerings by various fund houses in this category. So, while making a selection be careful about the track record of the fund that one wishes to invest in. Do check how the fund has weathered the various interest rate cycles, the processes followed by the fund to make investments and the overall return consistency in various market phases.   

To conclude, if you are an investor who is unsure of the nitty-grittis of debt investing but wants to invest with a long term horizon then a dynamic bond can be very helpful.  

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