IDFC Dynamic Bond Fund: Dynamic performance pays off - Buy

If you want to stay away from hard-guessing the direction of interest rates, then it may be a good time to look at dynamic funds. Interest rates in India are in a downward trend, but global uncertainties may lead to sudden shocks impacting your short-term returns on long-duration debt funds.

Dynamic funds have the flexibility to switch between short-term and long-term debt instruments, depending on the fund manager’s view on interest rates. Since the fund manager’s view is critical, it is best to pick funds with a consistent track record.

IDFC Dynamic Bond Fund has delivered 9.7-9.9 per cent over three and five-year periods, 80-100 basis points higher than its category average. The fund has also performed consistently across rate cycles, making the right calls on the direction of interest rates by actively managing the duration on debt.

Riding rallies

Depending on the interest rate scenario, the fund manager has increased or decreased the duration of the fund. In the 2014 bond rally, the fund gained a healthy 15.9 per cent, more than three percentage points higher than the category average. From about three years in the beginning of 2014, the fund increased its duration to eight years by the end of the year, which helped it cash in on the rally. The fund continues to maintain long duration, betting on the downward trajectory of interest rates in the coming months.

IDFC Dynamic also managed to weather sudden spikes in interest rates well. For instance, after reducing its key policy repo rates from April 2012, the RBI paused and reversed its policy stance in 2013 to defend the falling rupee. The unexpected hike in rates impacted bond prices. But during the sharp increase in rates in the June-August 2013 period, the fund managed to contain losses better than peers.

The fund had started trimming its duration from February 2013 itself, which helped it cap losses well. In the rate hike cycle between March 2010 and October 2011 too, when policy rates went up by a steep 375 basis points, the fund delivered a healthy 11 per cent, almost a percentage point higher than the category average.

Portfolio

The fund mostly invests in G-Secs, thus taking an active call on duration rather than on credit. The fund is currently fully invested — 98.6 per cent in government bonds with a duration of 8.6 years. Its current yield to maturity is 8 per cent.