Dynamic bond funds are debt mutual fund schemes which invest across durations depending on the interest rate outlook of the fund managers. When interest rate regime is favorable, these schemes invest in long duration bonds which can give high returns when yields decline. In rising interest rate scenarios, these funds invest in short duration bonds whose interest rate risks are limited. Dynamic bond funds are therefore, all season funds or in other words, they can perform well in different interest rate cycles. The interest rate risk of dynamic bond funds is higher than that of short duration funds, but is lower than that of long duration funds. You should be prepared for short term volatility because the switch over from a long duration to short duration investment strategy cannot be instantaneous and painless. If you want high returns in favorable interest rates scenarios and at the same time limit your downside risks in unfavorable interest rate scenarios, you may fund Dynamic Bond Funds suitable for your investment needs.
