With interest rates likely to head south, debt funds, especially dynamic bond funds, are garnering much attention.

As rates fall, bond prices are expected to rise. The effect is more pronounced in bonds with longer maturity tenures. Dynamic bond funds actively manage their portfolio based on their outlook on interest rates. They do this by increasing the ‘duration’ of their portfolio — adding on to longer tenure bonds — if rates are expected to fall and by reducing the portfolio duration — shifting to shorter-tenure bonds — if rates are expected to rise.

Over the past year, rates have moderated quite a bit; the 10-year G-sec yield has fallen from 8.8 per cent levels to about 7.8 per cent currently. This has given handsome gains to dynamic bond fund investors.

But there still seems to be room for reduction in rates, though it may not be as sharp as in the past year. Seeking to make use of this opportunity, Quantum Mutual Fund has launched the new fund offer (NFO) of Quantum Dynamic Bond Fund.

Low-risk portfolio

Among existing schemes, Birla Sun Life Dynamic Bond Fund, one of the top funds in the category, has delivered double-digit returns over the past one-three years and consistently beaten its benchmark. Other good funds in the category include UTI Dynamic Fund and Franklin India Income Builder.

One difference is that unlike many peers, Quantum Dynamic Bond Fund will play it very safe when it comes to credit risk (loss due to a borrower defaulting). The portfolio will be primarily invested in government securities and PSU bonds rated AAA or AA. It will not invest in private corporate debt and credit default swaps.

The flipside is that the fund will not be able to capitalise on higher returns offered by lower-rated corporate borrowers.

Another difference is that the fund’s expense ratio (up to 1 per cent) compares quite favourably with that of peers (average 1.5 per cent).

That’s because all of Quantum Mutual Fund’s schemes are sold directly to investors without routing through distributors; this saves the commission expense. Also, there is no lock-in period and exit load. Like in other debt funds, an investor who stays with the fund for more than three years will get indexation benefit while computing tax on the capital gains; this reduces tax outgo.

The NFO is open from April 29 to May 13, 2015.

The fund will be benchmarked to the Crisil Composite Bond Fund Index and managed by Murthy Nagarajan.

comment COMMENT NOW