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Debt funds were on a roll in 2014, thanks to a sharp fall of nearly a percentage point in the yields of 10-year government securities, pre-empting the Reserve Bank of India’s rate cut that finally came through in January.
But the interest in debt funds has weakened in recent months.
The emergence of several global and domestic factors has dampened the euphoria.
The sudden spike in crude oil prices, the rout in global bond markets, and risks to inflation from a possible weak monsoon leading to the RBI tempering its rate cuts, have increased the volatility in the domestic bond market.
If, as a debt investor. you dislike betting on the movement of rates, then dynamic bond funds that have the flexibility to switch between short- and long-term debt instruments, depending on the fund manager’s view on interest rates, are a good option.
UTI Dynamic Bond Fund has delivered consistent returns across rate cycles.
In the past one year, the fund delivered 10.6 per cent returns. Over a three-year period, the fund has clocked 10 per cent returns, falling within the top quartile of its category.
Right callsThe fund has actively managed the maturity of the portfolios. Remember, long-term bonds are more sensitive to rate changes, and hence switching long-term debt instruments with short-term papers can minimise the risk.
Between April 2012 and May 2013, during the previous rate-easing cycle, the fund clocked a healthy 14 per cent return. In the rate hikes that followed, the fund was quick to cap its losses by cutting down its maturity to two-three years.
The fund intermittently raised its maturity last year, delivering about 15 per cent return in 2014.
A higher maturity of about 13 years in March this year has impacted its returns till date.
But the fund has trimmed its duration to about seven years now. The fund invests in government securities and corporate bonds of AAA and AA rating.
The fund had assets worth ₹681 crore as on May. It currently holds 72 per cent in gilts and 12 per cent in AAA-rated bonds.
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