IDFC Dynamic Bond Fund: A safe choice amidst rate volatility

The fund has juggled duration adroitly to make the most of rate movements

Over the past year, the yield on 10-year government bonds has fallen by about 70 basis points, bringing cheer to bond investors.

Well-performing long duration gilt funds that are more sensitive to interest rates have delivered healthy, double-digit returns over the past year.

However, in the coming months, uncertainty over the RBI’s rate action could limit further upside in bonds with higher duration. On the contrary, such funds also run the risk of incurring losses if rates start to move up.

Conservative investors not wanting to bet on interest rate movements or take credit risk can opt for dynamic bond funds that switch between long and short-term debt instruments.

IDFC Dynamic Bond Fund, which predominantly invests in government bonds (80-90 per cent of portfolio over the past two to three years), has juggled its duration to make the most of rate movements.

The fund’s duration ranged from as low as two years to a high of eight years, over the past three years. The fund has delivered category-beating returns over one-, three- and five-year periods.

Many ifs and buts

Even though the yield on the 10-year G-Sec has fallen notably over the past year, it has been amidst volatility in the bond market. While the RBI’s rate cuts last year and the excess liquidity in the system post demonetisation led to a sharp fall in G-sec yield by the end of 2016 (to 6.2 per cent levels), the RBI shifting its policy stance from accommodative to neutral in the February policy saw bond yields inching up.

With the market factoring in zero possibility of rate cuts, the yield on G-Sec went up to 6.8-6.9 per cent levels between March and April, before heading south to 6.4 per cent levels on favourable inflation numbers.

But even as the RBI gave in to market expectations and lowered its key policy repo rate in the recent August policy, the bond market, having already factored in a rate cut, has not rejoiced much.

In fact, with the RBI still sounding cautious over the recent inflation trend and sticking to its neutral stance, G-Sec yield has slightly inched up to 6.5 per cent levels. The recent July CPI inflation witnessing a slight uptick may continue to keep bond markets on tenterhooks. Given the many ifs and buts in rate movements, investors unwilling to take risk are better off with dynamic bond funds at this juncture.

Consistent performer

Over three and five-year periods, IDFC Dynamic Bond Fund has beaten its category by around 70 bps.

Over the past year, the fund has outperformed category by a wide 2 percentage points, delivering a healthy 10.6 per cent return.

Deft juggling of duration has led to the fund’s steady and healthy returns.

Currently, the fund has a duration of 6.7 years, close to the higher end of its historical band. The fund manager may tweak it in the coming months based on rate expectations.

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