UTI Dynamic Bond Fund: Fine strategy to contain downside

The rate easing cycle that began in January 2015 has come to an end. Rate increases are imminent this year; the yield on 10-year G-Sec ruling at 7.7 per cent, over 1.5 percentage points above the RBI’s repo rate of 6 per cent, is indicative of the rising rate cycle.

For conservative investors with shorter time horizon, avoiding interest rate risk by staying away from duration calls would be prudent. This implies steering clear of long-term gilt funds that are more sensitive to rate movements. But aggressive investors with a three to five-year horizon shunning duration calls altogether may not be wise.

Dynamic bond funds that have the flexibility to juggle between short-term and long-term debt instruments are ideal for such investors. Active management of duration helps these funds contain downside better in an iffy market, while making the most of bond rallies. UTI Dynamic Bond Fund has been a top quartile fund within its category over the long run, beating category returns by about one percentage points over three and five years. Since its inception in 2010, the fund has delivered an annual return of 9.16 per cent, across various rate cycles.

Consistent performance

Interest rate movements in the economy impact bond prices. As longer duration bonds are more sensitive to interest rates, the fund manager increases duration to cash in on the rally in bonds in a falling rate scenario. In a rising rate environment, the fund manager reduces the duration of the fund to cap losses.

UTI Dynamic Bond Fund’s active management of duration has helped it ride rate movements efficiently. In the lacklustre years of 2013, 2015 and 2017, for instance, when long-term gilt funds as a category (on an average) delivered delivered 3 per cent, 6 per cent and 2 per cent returns respectively, UTI Dynamic Bond Fund managed to rake in higher returns of 7.6 per cent, 6.9 per cent and 4.2 per cent respectively in these years. The fund has also been able to make the most of rallies. In 2014 and 2016, for instance, it delivered returns of 14.7-14.9 per cent, only slightly lower than the 15-16 per cent returns that long-term gilt funds managed to give in these years.

Through 2016, the fund maintained average maturity of 9-11 years. While it lowered it slightly to 6-8 years in 2017, the relatively higher maturity has impacted its performance a tad in the past year. However, over the past two months, the fund has drastically reduced the maturity to 5.3-5.7 years, due to uncertainty over the rates. This should help investors ride volatility better.

Through 2017, the fund held 50-60 per cent in safe government bonds. Currently, it holds 39.5 per cent in G-Secs, 23.2 per cent in AAA rated bonds, 11 per cent in AA rated bonds and 25.7 per cent in cash.

The current yield-to-maturity (YTM) of the fund is about 8 per cent. In theory, the YTM of a debt fund is the rate of return an investor could expect if all the securities in the portfolio are held till maturity. In practice, however, this is only an indicative value and investors must remember that the YTM does not remain constant as the fund manager actively manages the portfolio.