High fluctuations in interest, and going with dynamic bonds?

We examine if it makes sense for an investor to choose dynamic bonds in a volatile market situation.

Investing in the share markets is all about an interplay between the current trends, interest rates and sudden movements. All of these factors influence one another and cause a change in the market stability. This can be seen in India’s current economic climate, which shows a trend of volatility on most business days. This volatility is born out of market fluctuations, within which investors and businesses are left to ponder their further course of action.

In such a market, investors can often be confused about the way ahead with regards to their money. The question to be answered most times is whether they should play the markets in the short term and try for a profit, or wait out the current scene over the long term. Some choose day trading in a volatile market, while less risk-averse investors keep an eye on the trends and make a profit at the right time.

It is not an easy task to predict the vagaries of the market. Instead of banking on intuition and luck to pull one through, investors would do well to put their faith in an investment instrument that aligns itself with market trends. Such an instrument is known as a ‘dynamic bond’. 

What is it? Simply put, a dynamic bond is a debt fund. It changes itself as per fluctuations in daily interest rate movements in the market.

How does it work? The tenure of the fund is chosen basis the investor’s or fund manager’s assessment of daily market trends. Future predicted market movements also play a role in this decision. Money is invested in the dynamic bond in inverse proportion to the investor’s prediction about market trends. Hence, if the investor foresees that markets are going to decline, he invests money in long term instruments. Conversely, short term instruments are invested in during signs of rising interest rates.

How does one earn money on these funds? Since they are adjusted to market interest rates, they offer greater stability and less risk to the investor. Thus the potential for higher returns is more with dynamic bonds. Their ‘dynamic’ nature minimises investment risk and insulates from the aftershocks of market swings. Whenever the market fluctuates, the fund simply repositions itself. These bonds are better than traditional debt funds, because they do not require minute-to-minute market monitoring to earn returns.

When should one invest in them? Dynamic bonds are the best investment option for volatile markets. They are especially useful when the market shows a sluggish trend, since they earn returns over a longer term and not right away. Thus the investor is insulated from losses that would arise from day trading in a sluggish market, for example. Investors are also protected from unexpected rate crashes. Ideally, investors should put their money in short term maturity bonds when there is high inflation but stable interest rates.