Though equity-oriented funds tend to overshadow debt-oriented funds for obvious reasons, the latter forms a very significant part of the mutual fund industry where long-term investments often flow in. With interest rate cuts catching on around the globe, it seems to be just a matter of time before Reserve Bank of India (RBI) also slashes interest rates.
Once that happens, it will signal party time for those investing in Gilt and Dynamic Bond funds in this country. According to data provided by AMFI (Association of Mutual Funds in India), at the end of August, there were 21 Gilt Funds in the market and 1.96 lakh folios in them. The net AUM at the end of August stood at Rs 35,550.97 crore. The number of Gilt Funds with 10-year constant duration was 5 which had 36,166 folios and a net AUM of 4,578.46 crore. For Dynamic Bond funds the numbers were – 22 schemes, 2.17 lakh folios and a net AUM of Rs 33,964.49 crore.
Some popular dynamic bond funds
Some of the popular bond funds in India are Kotak Dynamic Bond Fund, ICICI Prudential All Seasons Bond Fund, Aditya Birla Sun Life Dynamic Bond Fund, Canara Robeco Dynamic Bond Fund, Baroda BNP Paribas Dynamic Bond Fund, HSBC Dynamic Bond Fund, SBI Dynamic Bond Fund, HDFC Dynamic Bond Fund and Bandhan Dynamic Bond Fund.
Dynamic bond funds offer flexibility to the fund manager. As the name indicates, their managers can fine tune allocation guided by tweaks in interest rates.
Why bond funds can gain
Bond funds and interest rates have a deep and inverse relationship. When interest rates go down, bond prices go up and conversely when rates go up, bond prices go down. The reason is easy to understand: after rates go down future debt instruments would be issued with lower coupon rate and, therefore, the demand for current bonds with higher coupon rates would rise in the market.
As a natural corollary, those funds with longer maturities which have more of such bonds could get a shot in the arm when interest rate falls. If the RBI starts trimming the Repo Rate in the second half of FY25, as is predicted by almost all experts, these funds might make hay. It all depends on how accurately the fund manager can forecast interest rate movements.
Comments are closed.