Birla Sun Life Dyanamic Bond Fund: Rides market cycles dynamically

With the 25-basis-point rate cut in the recent October policy, the RBI has lowered its key policy repo rate by a sizeable 175 basis points since January 2015.

While the latest cut by the RBI can lead to the yield on the 10-year government bonds moving south, a sharp fall similar to the one seen in recent months is unlikely.

From 7.7 per cent levels at the beginning of this year, yield on the 10-year G-Sec has fallen to 6.7 per cent levels.

Gilt funds, which primarily invest in government bonds, have made hay, delivering 12-13 per cent returns this year.

Here on, however, the rally in bonds could be limited on several counts.

For one, as we near the end of the rate easing cycle, markets are likely to factor in current rates rather than future expectations and this should limit the downside in bond yields.

Also, much of the rally this year has been due to the RBI’s open market operations (OMOs) — buying of government bonds — since the April policy.

This helped in sucking out the excess supply of government bonds, leading to bond prices moving up and yields lower. It is unlikely that OMOs will happen at a similar pace, going ahead.

Given all these uncertainties, it may be a good idea for investors to consider dynamic funds that can switch between short-term and long-term debt instruments. Birla Sun Life Dynamic Bond Fund is one such fund that has deftly managed to switch between bonds of varying duration.

The fund has beaten its category across time periods and rate cycles, thus hogging the top quartile slot within its category. Over a three- and five-year period, the fund has delivered a healthy 11-12 per cent return, beating its category by 1.5-2 percentage points.

Birla Sun Life Dynamic Bond Fund’s ability to alter its duration finds more relevance in the current scenario, given the uncertainty over the timing of the RBI’s next rate cut.

As longer-duration bonds are more sensitive to interest rates, the fund manager increases or decreases the duration of the fund, depending on the interest rate scenario.

In the past, Birla Sun Life Dynamic has managed to make the best of bond rallies as well as cap losses, by making the right calls on rate movements and tweaking its duration.

In the period between March 2010 and October 2011, when the RBI increased its policy rate by a sharp 375 basis points, the fund managed to deliver a healthy 11 per cent return.

It also managed to keep its losses under check during the July 2013 liquidity tightening phase which saw rates spike. The fund lost about 2.9 percentage points between May and August 2013 when many other funds shed 4-6 percentage points.

In the 2014 bond rally, the fund outperformed its category by a wide margin, raking in nearly 15 per cent gains by upping its duration through the year.

From about 2.5 years in the beginning of 2014, the fund increased its duration to five to six years by the end of the year. While the fund trimmed its duration initially in 2015, it gradually increased it going into 2016. This has helped it register a handsome gain of 13 per cent over the past year, about two percentage points higher than the category average.

Over the last two years, the fund has mostly invested about 65-75 per cent of its portfolio in government bonds. It currently holds about 67 per cent in G-Secs and about 29 per cent in corporate bonds. Currently, 19.5 per cent of its portfolio is in AA rated bonds.

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