Should you consider investing in dynamic bond funds?

People are usually more inclined towards equity mutual funds than debt mutual funds for the simple fact that over the long-term equity MFs provides greater value to the investors than debt MFs. However, investment decisions taken just based on returns is a very ineffective way of investing. You can say it is better to invest in micro terms than on macro terms. This means that rather than looking at the portfolio as a whole (macro way), divide your overall portfolio into sub-portfolios which are exclusively designed for a particular objective (micro way). This way you would be much clear about in which sub-asset class to invest based on the time horizon of the objective and your risk appetite.
 
Before getting into the suitability and whether you should consider investing in dynamic bond funds, let us understand what are these dynamic bond funds. So as per the SEBI’s (Securities and Exchange Board of India) circular on re-categorization, dynamic bond funds are those who are open to investing in debt instruments or securities across durations, unlike many other debt funds which have restrictions based on durations. So while selecting dynamic bond funds, it would be wise to also consider the average maturity days or years as well as the credit ratings of the invested instruments. This will allow you to gauge the risk that you would be undertaking.
 
So if we look at the 1 year, 3 years and 5 years average returns then they are 6.19 per cent, 7.97 per cent and 8.98 per cent, respectively. As said earlier, returns must not be the only parameter. Now, what is the ideal time horizon one must look for? The ideal time horizon for dynamic bond funds is 5 years and above. So any of your investment objective which is 5 years and above can be considered.
 
Now let’s talk about whether you should invest in dynamic bond funds and its suitability. Yes, if your time horizon is long-term say 5 years and above then you can consider this as an investment option. However, you should consider investing it along with equities to get better diversification in asset class terms and overall portfolio performance. If we talk about suitability then conservative to balanced risk takers must avoid investing in these rather they may go with corporate bond funds. Conservative to moderately conservative risk takers and balanced risk takers may go with the combination of credit risk and corporate bond funds. Dynamic bond funds should be considered by moderately aggressive to aggressive risk takers along with credit risk funds.