A Beginner’s Guide to Investing in Dynamic Bond Debt Funds

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Dynamic bond funds are open-ended mutual funds that adapt to economic shifts most effectively and can navigate through interest volatility. These debt funds capitalize on interest rate movements and adjust asset allocation for maximum returns. Dynamic bond funds offer the potential for higher returns and can also be more volatile than short and medium duration debt funds.

Read on to make informed decisions if you are considering investing in these particular mutual funds.

What Are Dynamic Bond Debt Funds?

Dynamic bond debt funds are debt mutual funds that invest across bonds of various maturities. Fund managers adjust funds based on interest rate expectations and alter a portfolio across securities having different maturities accordingly.

These funds are ideal for those who are willing to wait for three to five years for good returns. If these funds are held for more than 36 months, the long term capital gains tax of 20% is applicable to them. However, they come with the benefit of indexation which makes the whole deal tax efficient.

Additionally, these funds give an investor the freedom to invest in securities with varied composition and maturities.

Factors To Consider Before Investing in Dynamic Bond Debt Funds

The four main factors that must be considered while investing in dynamic bond debt funds are as below:

  • Fund Manager Experience: A fund manager in the case of dynamic bond debt funds plays an important role. For instance, if the interest rates are expected to rise in the near future, an adept fund manager can increase investments in shorter-tenure debt securities. This is because they are less sensitive to alterations in interest rates.
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  • Compare Expense Ratios of Different Funds: By comparing the expense ratios of various funds under consideration, investors can make an informed decision. Lower expense ratios might yield higher returns over time, therefore, think and compare expense ratios before making any decision.
  • Interest Rates: Interest rates and bond prices are inversely proportional to each other. These funds adapt to fluctuating interest rates by providing the option to shift to other investment instruments.  An investor can easily shift from long-term to short-term to mid-term securities depending on the interest rate cycles.
  • Credit Quality: Evaluation of credit quality of underlying securities is a must. This enables investors to suit his or her risk-taking tolerance at the time of investing. Better credit quality implies low risk but may also offer lower returns. However, securities with lower credit quality might offer higher returns with increased risk.


Dynamic bond mutual funds can prove to be a valuable addition to an investment portfolio. The past performance of the fund as well as the fund manager must be evaluated before making an investment. Fluctuations in the bond market and interest rates impact these funds. These funds can be used to diversify portfolios. For more real-time updates about the stock and the fixed-income market and to invest in these instruments, open an account with Dhan and start your journey.

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