Stay away from Dynamic Bond funds

Dynamic bond funds have always been the choice of investors in a falling interest rate scenario. However, the recent spike in bond yields turned the returns of these funds into red. In the last three months, these funds have given very poor returns.
 
In the rising bond yield market conditions, these funds have failed to add value to the fixed income portfolios of investors. This can be seen by the category returns of dynamic bond funds, in the last three months, this category delivered return of 0.05 per cent. Previously in the year 2016, these funds generated double-digit returns due to falling interest rates.
 
These funds are for those investors who usually don’t want to take a bet on interest rate movement. Fund managers of dynamic bond funds have the freedom to churn their portfolio with respect to the movement of the interest rate. Dynamic bond schemes eye to maximise the returns in both rising and falling interest rate conditions.
 
But the yields have gone up very sharply in the recent times which are reflecting in the returns of the dynamic bond funds. Moreover, the pace of rise in the bond yields was also sharp which hurt the long-term bonds. As most of the fund managers of Dynamic bond funds are sitting on the long-term bonds the category given a poor return.
 
Among 24 dynamic bond, IIFL Dynamic Bond Fund - Direct Plan, JM Short Term Fund - Direct Plan, Taurus Dynamic Income Fund - Direct Plan are the top performers for the last three months ending on March 12. However, with the rising bond yields investors are advised to stay away from the dynamic bond funds. Also, the current macro-economic environment suggests the likely increase in the interest rates which may further hurt the returns of the dynamic funds so it’s better to stay away from the dynamic bond funds in the current volatile market.