Fund Call . Kotak Dynamic Bond: Cash in on the bond rally

The RBI, in its latest policy review, delivered in line with expectations and lowered its key policy rate. This, alongside a change in stance from neutral to accommodative, spells good news for debt fund investors.

In recent weeks, the yield on 10-year G-Secs has fallen substantially by 30-40 bps, owing to sharp falls in crude prices and global yields, and rising expectations of rate cuts by the RBI on the back of lower inflation and disappointing GDP growth numbers for the March 2019 quarter.

However, it still needs to be seen if the Centre will continue to focus on fiscal consolidation or sway from the target to propel growth, which will have a significant bearing on bond yields.

Hence, for conservative investors who prefer stability and less volatility in returns, dynamic bond funds that have the flexibility to juggle between short- and long-term debt instruments are a good option. Kotak Dynamic Bond (known as Kotak Flexi Debt prior to change in categorisation norms, but with a similar mandate) has been among the top performers in the category, delivering 12.5 per cent returns in the past one year.

The sharp fall in yield on government bonds since September last year has bumped up its returns.

The fund steadily increasing its average maturity has also helped in cashing in on the bond rally. Even over a longer run — five- and 10-year periods — Kotak Dynamic Bond has delivered healthy returns of 8.5-9 per cent, on par or better than the average returns delivered by most other debt fund categories.

Investors with a two- to three-year horizon can invest in the scheme.

Active juggling

Dynamic bond funds help you cash in on rallies and cap losses in volatile markets, thanks to active management of duration by the fund managers.

Interest rates impact bond prices. As longer-duration bonds are more sensitive to interest rates, fund managers increase the duration to cash in on the rally in bonds in a falling rate scenario. In a rising rate environment, they reduce the duration of the fund to cap losses.

Kotak Dynamic Bond has been able to ride interest rate cycles efficiently over the years. For instance, in the lacklustre and volatile years of 2013 and 2015, the fund managed to deliver 8.8 and 7.5 per cent returns, respectively. In 2017, too, the scheme managed to deliver 5.6 per cent returns, beating the category average of 3 per cent. The fund reduced its allocation to government bonds and increased exposure to corporate bonds towards the end of that year; the average maturity declined to three years by the end of 2017, from six years in the beginning of the year.

In buoyant years, too, the fund has managed to rake in healthy returns. In 2016, for instance, it delivered 13 per cent returns, on par with its peers in its category. Over the past one year, the fund has managed to beat the category returns by a wide margin of around 4 percentage points.

Portfolio

The credit risk in Kotak Dynamic Bond is also relatively low as the fund mostly invests in AAA rated bonds or government securities.

As of April, it holds 70.8 per cent in AAA rated and government bonds. Top holdings include REC, Indian Railway Finance Corporation, Bank of Baroda, LIC Housing Finance, Sikka Ports & Terminals (Mukesh Ambani Group) and Reliance Industries.

The fund has upped the average maturity of its holdings over the last six months, possibly to cash in on the bond rally. From about three years in the September last year, its average maturity has gone up to 5.6 years as of April 2019.

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