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Though the performance of schemes from the debt funds segment may seem modest at present, investors would do well to remember that the uncertain interest rate environment has largely contributed to the same. Once interest rates stabilise, debt funds can score on the returns parameter as well. This argument also holds good for the debt components of balanced funds and monthly income plans (MIPs).
Despite the seemingly dire conditions, one segment from the debt funds category merits attention i.e. dynamic debt funds. Simply put, dynamic debt funds are regular debt funds with a flexible investment style. These funds invest across a variety of debt instruments ranging from corporate paper, government securities to money market instruments. Also dynamic debt funds actively manage the portfolio's maturity and risk profile to clock superior growth. This is in stark contrast to conventional long-term debt funds where often a bulk of the investments are made in corporate debt and/or government securities; also a more stable investment approach is followed. However it must be noted that there is no watertight definition for dynamic debt funds and often funds positioned as conventional long-term debt funds also follow this style of fund management
Leading dynamic debt funds
| Dynamic Debt Funds |
NAV (Rs) |
3-Mth (%) |
1-Yr (%) |
Incep. (%) |
Avg. Maturity (yrs.)
Mar'05 Aug'05 |
| TATA DYNAMIC BOND (G) |
11.11 |
1.67 |
5.75 |
5.36 |
0.70 |
3.14 |
| DEUTSCHE DYN. BOND (G) |
10.44 |
1.38 |
5.73 |
2.39 |
3.12 |
0.72 |
| PRUICICI FLEX. INCOME (G) |
12.57 |
2.02 |
5.55 |
7.91 |
1.85 |
3.46 |
| UTI BOND ADVANTAGE (G) |
17.77 |
1.59 |
5.44 |
9.71 |
2.86 |
2.78 |
| GRINDLAYS DYN. BOND (G) |
12.49 |
1.60 |
3.17 |
7.14 |
1.02 |
1.42 |
(Source: Credence Analytics. NAV data as on September 15, 2005. Growth over 1-Yr is compounded annualised. Average maturity data sourced from fact sheets. )
The table above lists the top-performing dynamic debt funds over a 1-Yr time frame. Tata Dynamic (5.75%) emerges as the top performer; Deutsche Dynamic (5.73%) and PruICICI Flexible Income (5.55%) occupy second and third positions respectively. Broadly speaking it has been a very consistent performance from most dynamic debt funds. We would like to state that the funds chosen for the purpose of this study are the ones whose investment objective/positioning explicitly lays out their dynamic fund management style. As a result other funds which have been positioned as conventional long-term debt funds but pursue a dynamic fund management style have been left out of this study (and rightly so!).
The table below lists performances clocked by conventional debt fund peers of the top-performing dynamic debt funds. This will help us in understanding how long-term debt funds fare vis-à-vis their dynamic debt fund counterparts.
Long-term debt funds
| Debt Funds |
NAV (Rs) |
3-Mth (%) |
1-Yr (%) |
Incep. (%) |
Avg. Maturity (yrs.)
Mar'05 Aug'05 |
| UTI BOND FUND (G) |
20.34 |
2.20 |
9.45 |
10.93 |
3.08 |
3.81 |
| DEUTSCHE PREM. BOND(G) |
11.69 |
1.85 |
6.23 |
10.66 |
4.82 |
6.73 |
| PRUICICI INCOME (G) |
20.22 |
1.53 |
4.86 |
8.74 |
1.96 |
4.37 |
| TATA INCOME (G) |
22.39 |
1.20 |
3.74 |
5.50 |
0.94 |
1.69 |
| GRINDLAYS SUP. SAVER (G) |
15.94 |
1.28 |
3.22 |
4.83 |
1.63 |
2.84 |
(Source: Credence Analytics. NAV data as on September 15, 2005. Growth over 1-Yr is compounded annualised. Average maturity data sourced from fact sheets.)
It has been a mixed bag for the long-term debt fund siblings of top-performing dynamic debt funds. While funds like UTI Bond (9.45%) and Deutsche Premier Bond (6.23%) have comfortably outperformed their peers UTI Bond Advantage (5.44%) and Deutsche Dynamic Bond (5.73%) respectively, other like PruICICI Income (4.86%) have trailed their dynamic peers.
The impressive performances delivered by some long-term debt funds can be credited to their higher maturity profiles. In recent times bond yields on the longer end have dropped significantly. For example the 10-Yr benchmark bond yield fell from 7.25% (May 2005) to 7.00% (September 2005). Falling bond yields translating into higher bond prices and net asset value (NAV) for debt fund investors.
Conventional long-term debt funds with their relatively higher maturities (readers should note that this wasn't always the case; not too long ago, we learnt from our interactions with corporates about how most long-term debt funds had low maturity profiles akin to short-term funds leading to corporates not having suitable investment opportunities) were equipped to gain from the same vis-à-vis dynamic funds with lower average maturity profiles.
Powered by their fluid investment styles, dynamic debt funds are theoretically equipped to tide over an uncertain investment environment like the present one. Investors should consider adding dynamic debt funds to their portfolio after taking into account their risk profiles, investment objectives, investment tenures and existing asset allocations. More importantly there is a need for investors to scrutinise their portfolios and determine if they are overweight in a single asset class like equities. The key to achieving financial goals is proper asset allocation rather than investing in a hot asset class.