Birla Sun Life Dynamic Bond: Buy. Ride the rate-cut cycle on this fund

Investors could consider debt funds as interest rates are on their way down.

The RBI took the markets by surprise once again and cut its key policy repo rate, outside the policy review cycle, recently.

However, given that a chunk of the rate cut — 50 basis points — has happened in the beginning of the year, the pace of decline in bond yields (over 100 basis points) will not be as sharp as that seen in the last one year.

It may be a good idea for investors to consider dynamic funds as they can switch between short- and long-term debt instruments. Birla Sun Life Dynamic Bond actively manages duration on debt and may offer a good opportunity for investors with a medium-term horizon. It is one of the top performers in its category across rate cycles and has beaten its benchmark by 1.5-2 percentage points over longer time frames.

Over a five-year period, it has given annual returns of 9.5 per cent, placing it among the top funds in its category.

Over this period it has delivered ahead of funds such as ICICI Pru Dynamic Bond, Franklin India Income Opportunities and SBI Dynamic Bond.

In the bond rally of 2014, the fund increased its duration from about 2.5 years in the beginning of the year to five-six years by the end of the year.

This helped it deliver 15.4 per cent return in the last one year, almost 5 percentage points higher than its benchmark.

The fund has also cut down its duration when rates were on the rise. It scaled down its duration to about 1.5 years when short-term rates spiked due to the RBI’s tightening measures in July 2013.

The fund has beaten its benchmark about 87 per cent of the time since its inception more than 10 years ago.

Over the last two-three years, the fund has invested about 40 per cent of its portfolio in corporate bonds and about 35 per cent in government securities.

Unlike its peer, Franklin India Income Builder Account, Birla Sun Life Dynamic Bond has invested about 25 per cent in AAA rated bonds and 15 per cent in AA rated bonds, thus taking lesser exposure to higher-risk securities. Its yield-to-maturity, at 7.8 per cent, is healthy. In the last six- nine months, the fund has substantially increased its exposure to government bonds. It currently holds 56 per cent in gilts.

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