What are Dynamic Bond funds?
As per the SEBI circular on categorisation and rationalisation of mutual fund schemes, dynamic bond funds are debt mutual funds, which are free to invest across bonds and fixed income instruments irrespective of their duration, residual maturity, credit quality or issuer types. The flexibility available to the fund managers of dynamic bond funds are the same as that of flexi cap fund managers, who are free to invest across large cap, mid cap or small cap stocks without any SEBI-imposed limits.
Table of 10 Best Dynamic Bond Funds
| Fund Name | Returns (% p.a.) | |||
| 1 year | 3 year | 5 year | 10 year | |
| Aditya Birla Sun Life Dynamic Bond Fund – Direct Plan | 10.12 | 9.57 | 7.63 | 7.14 |
| ICICI Prudential All Seasons Bond Fund – Direct Plan | 10.02 | 9.14 | 7.43 | 9.02 |
| Nippon India Dynamic Bond Fund – Direct Plan | 10.55 | 8.87 | 6.28 | 7.68 |
| SBI Dynamic Bond Fund – Direct Plan | 8.90 | 8.83 | 6.41 | 8.44 |
| Baroda BNP Paribas Dynamic Bond Fund – Direct Plan | 8.78 | 8.74 | 6.31 | 7.47 |
| Kotak Dynamic Bond Fund – Direct Plan | 9.06 | 8.66 | 6.64 | 8.66 |
| Quantum Dynamic Bond Fund – Direct Plan | 9.33 | 8.65 | 6.61 | 7.96 |
| 360 ONE Dynamic Bond Fund – Direct Plan | 10.73 | 8.55 | 7.29 | 7.63 |
| PGIM India Dynamic Bond Fund – Direct Plan | 9.45 | 8.47 | 6.50 | 8.28 |
| DSP Strategic Bond Fund – Direct Plan | 8.18 | 8.42 | 6.14 | 7.83 |
Data as of July 10, 2025
Why Invest in Dynamic Bond Funds?
Dynamic bond funds have the flexibility to invest across various types of bonds and other fixed income instruments having different maturity profiles, credit ratings and duration profiles. These flexibilities allow dynamic bond funds the potential to generate higher risk-adjusted returns for their investors.
Flexibility to invest across duration: The flexibility to invest in bonds across maturity and duration profiles allows fund managers to rebalance their fund portfolio as per their assessment of the changing interest rate scenarios. The term ‘duration’ refers to the sensitivity of a bond’s price in relation to the changes in the interest rates. For example, during a falling interest rate cycle, a fund manager can increase his exposure to bonds having longer residual maturities to earn higher potential capital gains. During such interest rate scenarios, fixed income instruments having longer maturity profiles generate higher capital appreciation than those with shorter maturity profiles. Similarly, fund managers of dynamic bond funds can increase their exposure to short duration bonds to reduce the interest rate risk caused by rising interest rate cycles.
Flexibility to invest across credit profile: The flexibility to invest in bonds across the credit spectrum help fund managers rebalance their portfolio as per the changing economic cycles. So, during growth cycles, fund managers of dynamic bond funds can increase their exposure to corporate bonds having lower ratings for higher accruals and make capital gains from their potential rating upgrades. Similarly, fund managers can replace their lower-rated corporate bond exposure with government bonds and higher rated corporate bonds to reduce the increased credit risk during economic downturns.
Flexibility to invest across issuers types: Dynamic bond funds also have the flexibility to invest across issuers types and sectors, which allows fund managers to avoid increased credit risk arising in specific issuer group(s) and/or sectors of the economy.
Risks of Investing in Dynamic Bond Funds
While the flexibility to change portfolio allocation as per changing interest rate and market cycles reduce the risks in investing dynamic bond funds, these bonds are still not completely immune from some of the risks faced by other debt fund categories. Here are some of the common risks of investing in dynamic bond funds.
Interest Rate Risk: While the ability of dynamic bond funds to change their portfolio allocation basis changing interest rate scenarios reduces their interest rate risk with respect to some debt fund categories, the interest call of their fund managers may not always be accurate. Wrong interest rate outlooks may lead funds to end up with sub-optimal portfolio allocation and thereby, adversely impact their returns.
Credit Risk: As dynamic bond funds have the flexibility to invest across the credit rating spectrum, some funds may invest in lower rated securities to earn higher accrual income or generate higher capital gains through rating upgrades. If such investment calls go wrong after security selection, it can adversely impact the credit risk for dynamic bond fund investors. Investors seeking to further reduce this risk should go through the investment strategies of the respective debt funds stated in their Key Information Memorandum, Scheme Information Memorandum, product leaflets or other literature from their fund houses. Doing so will allow the investors to know the type of credit risk exposures mandated by these funds and then, invest as per their risk appetite.
Who Should Invest in Dynamic Bond Funds?
- Investors seeking optimal risk-adjusted returns from fixed income investments across different market or interest rate cycles.
- Investors having moderate risk appetite and investment horizons of at least 3 years.
- These funds are ideal for investors who cannot take fixed income investment calls on the basis of interest rate cycles and/or economic cycles.