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Dynamic Bonf Mutual Funds
These flexi bond funds are safe but do not assure best of returns
THERE is perhaps no other investment instrument that confuses investors seeking exposure in that asset class more than the debt mutual funds. The number of categories has baffled, and continues to baffle, a vast majority of investors exploring or seeking a debt asset class exposure through debt funds.
Consider the range of open-ended debt funds -liquid funds, ultra-short term debt funds, short term bond funds, income or bond funds, dynamic bond funds, floating rate income funds and gilt funds.
Add to it the close-ended fixed maturity plans (FMPs) and the semi-close ended interval debt funds.
The debt instruments invested in by this wide range of debt funds include money market instruments (like CBLO), bank certificate of deposits, corporate non-convertible debentures and government securities (G-secs).
Till some years ago, it was easy to match a fund type with the average tenure a scheme from that fund type will have in its debt portfolio. So, a long term income fund would definitely have an average portfolio maturity (APM) of more than three years, compared with a medium term bond fund and a short-term bond fund that would have their APMs as one to three years and six to 12 months, respectively.
But over the past few years, debt fund managers have used the leeway available in their broad and flexible investment objectives and allocation patterns to have wide-ranging and fast changing APMs.
The trick, therefore, which some debt investors have already learnt, is to first deploy a good chunk of their investment funds, allocated to debt asset class, in open-ended dynamic bond funds.
Dynamic debt funds would typically have the word `dynamic' or `flexi' in their scheme names and the implication of the word is that the fund manager gets to invest in debt paper having outstanding maturities from as low as a few days (as in the case of CBLO instruments), to as high as 10 years (as in the case of G-secs).
With this wide range available upfront, the relationship between interest rates and investment tenures can be managed by dynamic bond funds far better than other debt fund types. Investors can legitimately expect a dynamic bond fund manager to optimise returns across fluctuating interest rates and their cycles.
This approach does not necessarily guarantee highest returns among all debt fund types but it frees investors from having to actively juggle his debt corpus among ultra-short term funds, and bond funds ranging from short-term to long-term.
Close-ended FMPs: Funds remaining after deployment in open-ended dynamic bond funds can be invested in close-ended FMPs. FMPs come in varying maturities from three months to five years. This, coupled with the fact that their closeended nature allows them to lock in their corpus at a tenure matching the duration of the scheme, allows investors to choose the maturity periods according to the periods for which they want to have a debt market exposure. So, if a part of an investor's deployable debt corpus would be needed back in six months, that sum can be invested in a six-month FMP .
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