FundsIndia Recommends: Reliance Dynamic Bond Fund

If you are looking to ride what could be the last leg of the interest rate cycle over the next couple of years, and if you can stomach enough risks, then Reliance Dynamic Bond Fund is the right fund for you. With a return of 10 per cent annually in the last three years, the fund holds the potential to deliver inflation-beating returns over the medium term. The above return is a good 2.5 percentage points higher than its index, NSE G-Sec Composite Index.

Suitability

The risk-reward ratio is currently more favorable for long-term bond funds as interest rates can be expected to ease over the next 18 months. Reliance Dynamic Bond Fund is among the better performers in the long-term bond fund category. While fixed deposits of banks and companies offer attractive returns in high interest rate periods, they cannot sustain it in down cycles. This is why you will seldom have banks offering attractive rates on long-term deposits of say 5, 7 or 10 years.

Dynamic bond funds increase exposure in long-term bonds to gain from any fall in interest rates. An inverse correlation between interest rate movements and bond prices ensures that if the interest rate falls in the economy, long-term bond yields fall, and bond prices increase and generate capital gains for you.

Longer the tenure of the bond portfolio, higher the sensitivity of their price. For instance, if interest rates fall by 0.5 per cent, the price of a 10-year bond tends to rise much higher than that of a 1-year bond. But the converse is also true in a rising rate scenario. That means in a long duration bond, a wrong move can hurt in the short to medium term.

Hence, to reduce risks related to such short-term volatility, consider staying invested in Reliance Dynamic Bond Fund for not less than 2 years.

Performance 

Given the volatile nature of long tenure bonds, Reliance Dynamic Bond has done well through SIPs over a 3-year period. It delivered 11 per cent annually through SIPs done in the last 3 years. The fund’s point-to-point performance over the last three years is around 10 per cent.

The fund’s consistency is proven by its rolling returns. On a two year rolling returns basis (over the last three years), the fund has generated 9.3 per cent returns (average) compared to the 6 per cent average returns generated by its index (NSE G-sec Composite Index).

Its average rolling three-year returns of 9.3 per cent suggests that the fund can deliver this return irrespective of when you invested. It beat its benchmark a good 82 per cent of the times over the last three years. Over the last five calendar years, it has beaten its category average and its benchmark by a notable margin.

In July, the fund invested more than 50 per cent in government securities (gilt), and increased its exposure gradually over the last 5 months. It has immensely benefited from the gilt rally that happened from August 2014, delivering handsome returns over the last 5 months.

Portfolio

The fund intends to maintain a dynamic approach towards portfolio management by actively managing duration. This is to position itself across interest rate cycles and benefit from any ensuing opportunity available in the debt market space.

The fund holds about 69 per cent in government securities and 26 per cent in corporate bonds. The flexible asset allocation of the fund enables the fund manager to take opportunistic bets on government securities to increase duration, as well as to take exposure to money market instruments to provide liquidity.

Over the last 3 years, the minimum gilt exposure was 25 per cent and the maximum exposure was 65 per cent. The fund has a weighted average maturity of 15.2 years at present and a modified duration of 7.8 years.

That the fund primarily takes duration calls is reflected in its portfolio. About 60-80 per cent of its portfolio includes medium to long-term calls, while 10-20 per cent of its portfolio are tactical calls to take benefit of short term opportunities in the market.

Apart from gilts, Non Convertible Debentures (NCDs) from the Oriental Bank of Commerce, Reliance Jio Infocomm, Reliance Utilities and Power, Kotak Mahindra Bank and Axis Bank are some of its prominent holdings.

Prashant Pimple manages the fund.

*Mutual Fund investments are subject to market risks, read all scheme related documents carefully. Past performance is not indicative of future results. To know how to read our weekly fund reviews, please click here.