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What to do with Birla Sun Life Dynamic Bond Fund

One of my clients had invested Rs. 5 Lakhs in Birla Sun Life Dynamic Bond Fund in December 2016 when this fund was at it's all time high. However, now his portfolio has eroded significantly by 4.25%. For how long should this investment be held to recoup the losses? Also, why is the fund not dynamic enough to change it's debt portfolio now when the interest rate Outlook in the economy has changed?

Apr 27, 2017 by Nandita, Mumbai  |   Mutual Fund

Birla Sun Life Dynamic Bond Fund is a good medium term debt fund, but it is highly sensitive to interest rates. Hopefully, you would have advised a sufficiently long investment horizon (2 – 3 years) for this fund to your client. The interest rate environment in the last 4 months or so have been challenging. In December 2016, the US Federal Reserve raised interest rates, which put upward pressure on bond yields in India. Again in February / March 2017, the commentary of the RBI was surprisingly a little conservative on inflation worries, which caused a negative reaction in debt markets. But the situation is easing now. In the last one month this fund has recovered around 0.8%. With the rupee strengthening, lot of foreign investors are showing interest in Indian debt market. Foreign fund flows in debt market will help yields ease further. Hopefully, your client will be able to recover his losses in the next 5 or 6 months because the market does not anticipate the Fed to hike interest rates in the summer (till early September 2017). However, a watch out for you will be the monsoon forecast in India; reliable forecasts will be available by the end of May. If the monsoon forecast is bad then, obviously, it will be a negative for debt fund investors.

Your point on flexibility of strategy based on interest rate outlook is fair. We cannot speak on behalf of Birla Sun Life Mutual Fund. In our view dynamic bond fund managers adopt a strategy based on a longer term outlook. While the short term interest rate outlook changed since the RBI meeting in the mid February, the longer term (12 to 18 months) outlook is still favourable, as per a number of debt fund managers from different fund houses, whom we have interviewed in the recent past. If the outlook worsens based on inflation forecasts and Fed decisions later in the year then dynamic bond fund managers will have to change their strategy, but based on what we know so far the longer term outlook is favourable.

Hope the above helps. Thanks for writing to Advisorkhoj!

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