The interest rate movement in the stock market influences the returns of a bond fund. When interest rates go down, long-duration bond funds are benefited the most. Whereas, when interest rates are rising, these funds are not fruitful.
Factors such as inflation, government borrowings, RBI’s monetary policy, etc. explain the interest rate movement which is required to be understood before investing in bonds. And for those, who can’t apprehend interest rate movements should invest in dynamic bond funds as they are open-ended debt schemes that invest in securities of varying maturities. They are sensible in the case where a moderate to high-risk appetite investors can enjoy the interest cycles.
Riding the interest rate cycles
Dynamic bond fund managers proactively manage the interest rate movement. They lively move investments between long-term and short-term bonds to surge or drop the portfolio’s maturity for sorting advantage of fluctuations in interest rates to sail through volatility swiftly. If a fund manager anticipates an increase in interest rate, the manager may sell long-term securities and invest in short-term maturity papers for the welfare of the portfolios.
Moderate to high-risk appetite
The investors must invest for a time horizon of 3+ years. These funds are advocated for the moderate to high-risk profile investors due to the interest rate movement.
Things to Remember
1. Focused credit quality: On the credit side, MyFinopedia suggests opting for AA+ and above-rated Dynamic Bonds.
2. Disciplined monitoring: MyFinopedia keeps an eye on the performance of dynamic bond funds regularly on monthly basis.