Dynamic bond funds buck sector trend

Assets double over three quarters, even as those for the overall industry declined six per cent

The mutual fund industry’s dynamic bond funds have seen a steep rise in their assets under management over the past three quarters.

The active duration management of these funds and their ability to quickly reposition the maturity profile to suit the changing interest rate environment helped performance. During such uncertain times, bond yields have remained volatile at between eight and nine per cent.

For instance, the assets of Birla Sun Life Dynamic Bond Retail Growth almost tripled, while those of IDFC Dynamic Bond and Reliance Dynamic Bond increased 10-fold and by eight times, respectively. Overall, the industry’s assets in the category during the period more than doubled to Rs 10,190 crore as on March 2012 from Rs 4,080 crore in June last year. This happened at a time when the industry’s overall assets declined six per cent.

“The way dynamic bond funds have fast-adjusted their maturity profiles and investment portfolios, given the uncertain environment, helped them draw inflows from investors,” says Dhruva Chatterji, senior research analyst at Morningstar India. Many of these have been among the top performers in the bond funds segment in the past year.

DYNAMIC RISE IN ASSETS
Scheme	Assets Under  Management (Rs cr)		Rise (%)
	June ‘11	March ‘12
HDFC Medium Term Opp Gr	0.93	620.94	66316.59
SBI Dynamic Bond Gr	17.07	497.81	2815.81
IDFC Dynamic Bond A Gr	50.90	482.91	848.71
Reliance Dynamic Bond Gr	37.00	318.20	760.00
Birla Sun Life Dynamic  Bond Retl Gr	1872.18	5348.06	185.66
Taurus Dynamic Income Gr	58.49	151.06	158.28
HSBC Flex Debt Retl Gr	53.96	127.87	136.95
Overall Category	4079.80	10189.83	149.76
Source : Morningstar India

Dynamic bond funds allow flexibility to the manager to actively manage the duration, depending on interest rates. Typically, the duration and average maturity tend to be longer if the manager feels rates are likely to fall. However, when interest rates are likely to rise, the fund manager prefers a shorter duration portfolio, as it limits the interest rate risk and provides more flexibility to realign the portfolio.

SBI Dynamic Bond Fund, which had increased its average maturity profile to an excess of eight years in November 2011, cut it to less than a year in March 2012. Reliance Dynamic Bond Fund, which had increased its average maturity to 11.5 years in November 2011, cut it to 3.73 years in March 2012. “Most other dynamic bond funds have also cut their average maturity, especially in the month of March,” adds Chatterji.

According to the income head of a foreign fund house, the flows have happened over three quarters. “So, one cannot rule out the fact that it’s only institutional money. Several retail investors, as well as high net worth individuals, tend to put money in such funds, especially when the equity markets continued to remain poor,” he says.

There’s a possibility, he adds, that amid the changing investment portfolios, these funds may have lost their dynamic nature. “As the rates remain high, money market instruments may have proved lucrative to fund managers,” he notes. A number of fund houses had recently launched dynamic bond funds. IDBI MF, Pramerica and Union KBC launched such funds in the beginning of the year. Principal and Daiwa have plans to do so.