With many uncertainties about where interest rates will head, debt fund investors may be unable to decide whether to park money in short-term debt funds or long-term gilts. The UTI Dynamic Bond Fund is just right for such investors. The fund has negotiated both rising and falling rate cycles quite well, with timely calls on duration.
It has outperformed its benchmark across rate cycles. In the last one year, the fund delivered 11.3 per cent return amidst sharp volatility in rates, trumping its benchmark’s 7.4 per cent return.
Right callsAfter reducing the key policy repo rates from April 2012, the RBI paused in May 2013 and changed its policy stance. The unexpected hike in rates impacted bond prices, since interest rates and bond prices have an inverse relationship. But UTI Dynamic was able to limit the loss during this period, by reducing its average maturity sharply in the month of June last year.
In general, long-term bonds are more sensitive to rate changes. Switching to long-term debt instruments with short-term papers can lower risks.
The fund’s average maturity of 7.7 years in May last year was reduced to three years in June and to just 1.8 years in July 2013. This helped the fund cap its losses.
The fund substantially cut its exposure to long-term gilts from February 2013 onwards and in the months of June and July had almost no exposure to G-secs. Since September 2013, there has been a gradual reversal of the RBI’s tightening measures.
After increasing its exposure to gilts to 60-68 per cent in April, May 2014, the fund has brought it down to 16 per cent in June. The average maturity is also down to 2.6 years from 7.7 years in May, indicating the fund manager’s cautious stance.
In the past too, the fund has outperformed its benchmark.
Consistent performerDuring the previous rate hike cycle from January 2010 to October 2011, the fund returned 9.9 per cent(fund started in June 2010).
It also made huge gains during rate cuts. Between April 2012 and May 2013, it clocked a handsome 14 per cent return. The fund has also outperformed its peers such as Birla Sun Life Dynamic Bond Fund and DSP BR Strategic Bond Fund over one- and three-year periods by 1-3 per centage points. The fund now holds 16 per cent in gilts, 27 per cent in non-convertible debentures issued by companies and the rest in cash. In terms of credit profile, the fund invests close to 23 per cent in AA-rated securities.
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