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MFs line up to launch dynamic bond funds

Fund houses are lining up to launch open-ended dynamic bond funds, anticipating volatility in bond markets and a gradual decline in interest rates in the coming months.

Fund houses are lining up to launch open-ended dynamic bond funds, anticipating volatility in bond markets and a gradual decline in interest rates in the coming months.

IDBI Mutual Fund, Pramerica Mutual Fund and Union KBC launched dynamic bond funds in January. Daiwa Mutual Fund and Principal Mutual Fund have filed their offer document with Sebi to launch these funds. While interest rates seem to have peaked, uncertainties with respect to inflation, global economy and currency movements persist. That makes it difficult to determine when the central bank will begin slashing rates. Dynamic bond funds are ideal for those who don?t want to take a call on interest rate movements, said market participants.

?Interest rates are expected to fall but there is likely to be a fair amount of volatility in the money market, as well as government and corporate bond markets. Dynamic bond funds are well-suited to capture this volatility in interest rates provided the fund manager is able to get his calls right,? said Dhawal Dalal, executive VP and head ? fixed income, DSP BlackRock Mutual Fund.

According to Killol Pandya, head-fixed income, Daiwa Asset Management, dynamic bond funds are well placed to take advantage of market uncertainties. ?These funds can be positioned to take immediate advantage of rate cuts. The portfolio can also be seamlessly altered with respect to its duration and asset composition,? said Pandya. For instance, the fund manager could invest in CDs and CPs right now and sell these instruments when interest rates begin to soften. He can then reinvest into debentures, which have a longer tenure. This does away with the need to switch funds frequently.

The AUM of dynamic bonds declined from R11,200 crore in June 2010 to R4,000 crore in June 2011 as investors shifted their attention to high-yielding fixed maturity plans, Morningstar India data shows. However, as of September 2011, the assets rose to about R 5,500 crore, indicating a renewed interest in these funds.

Dynamic bond funds have given returns of 3.17% (3-month), 4.73% (6-month) and 9.03% (1 year), according to Morningstar India. In general, these funds outperformed within the income fund category in 2011. ?Funds that altered their maturity profile and capitalised on the change in interest rates and the subsequent rally in the bond markets in the last quarter gave relatively better returns,? said Dhruva Chatterji, senior research analyst, Morningstar India. Outperformance could be difficult at times. ?Dynamic bond funds may find it difficult to optimise returns in case inflation or fiscal deficit remains high or if there are sudden changes in the macro-economic situation,? said Pandya.

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First published on: 03-02-2012 at 03:03 IST
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