What are dynamic bonds in debt mutual funds?

Debt funds are a type of mutual funds that invest primarily in fixed income instruments. The performance of the debt fund is inversely proportional to the market interest rates. If the interest rates rise, returns of debt funds drop. However, when the interest rates fall, debt funds gain value. But there is a class of debt funds that gains in both situations – rising and falling interest rates. Such funds are known as dynamic mutual funds.

Here is everything you should know about dynamic bonds:

What are dynamic bonds in debt mutual funds?

Dynamic bonds in debt mutual funds alter their portfolio allocations dynamically between short-term and long-term bonds. This strategy enables these mutual funds to benefit from the fluctuating interest rates in the market. 

These mutual funds are dynamic in composition and maturity profile. They are not restricted by investment duration or maturity of the securities they invest in, giving the fund managers freedom to invest in securities depending solely on their interest rate outlook. 

How do dynamic bonds work?

Dynamic bonds dynamically manage the lending duration to take advantage of fluctuating interest rates. The fund managers increase or decrease the lending duration according to the interest rate movements. So, if the fund manager analyses that the interest rates will likely drop in the coming days, they can switch to long-term bonds. Alternatively, if the fund manager feels that the interest rates have touched their lowest point and a market correction is expected soon, they can switch to short-term bonds to prevent losses from long-term bonds.

This functioning helps to even out the fluctuating interest rate changes. If need be, the fund manager can also invest in corporate bonds or gilts to take advantage of interest rate changes.

Who should invest in dynamic bonds?

Dynamic bonds are ideal for investors with a moderate risk appetite and an investment duration of three to five years. These mutual funds also work well for investors who are not adept in analyzing the market movement and structuring their portfolios to benefit from the interest rate fluctuations. Investors can further reduce their risk in dynamic bonds by investing through the SIP (Systematic Investment Plan) mode because the SIP mode spreads investment costs over a longer duration and can help combat volatility in the long run.

A fund manager plays a critical role in dynamic bond management. However, the overall returns depend on the interest rate movement. 

What to consider before investing in dynamic bonds?

If you are considering investing in a dynamic bond mutual fund scheme, be careful of these aspects:

  • Research about the fund manager and assess the past performance of their dynamic bonds.
  • Be wary of macro-economic factors like government policies, inflation, etc., and aim to invest for a long term, minimum of three years.
  • Study the performance of the dynamic fund over the last five years.


Use the Tata Capital Moneyfy app to find the right dynamic bond and check their past performance. The Moneyfy app also allows you to invest in the mutual fund scheme of your choice and monitor and modify your portfolio when required.