Short Duration Fund Vs Dynamic Bond Fund: Risk And Benefit

Short Duration Fund Vs Dynamic Bond Fund: Risk And Benefit

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Short Duration Fund

Short-duration funds invest in debt and money market assets with a portfolio duration of 1 to 3. As a result, short-duration funds can invest in both short and somewhat longer-term debt assets. These funds’ investment goal is to generate income through accruing over the maturity period of the instruments in the scheme portfolio. Depending on the credit quality of the underlying instruments, the credit risk of short-term funds might vary from scheme to scheme. Short-duration funds are good investment options for investors who are looking for medium-term investments. Investors who are willing to take on some interest rate risk in exchange for better returns can look into short-term funds.

Dynamic Bond Fund

Dynamic Bond Fund

The dynamic bond funds are a type of mutual fund and the fund is dynamic in terms of composition and maturity profile, as the name indicates. These funds invest in debt instruments. Dynamic bond funds’ principal goal is to generate ‘optimal’ returns in both rising and declining market conditions. Returns, on the other hand, are mostly determined by the fund manager’s actions and portfolio management. These funds often handle large sums of money, with a portfolio totaling several thousand crores or billions of rupees. There may be a considerable period of time between interest rate manipulations. During those considerable times, the bond investors’ income may suffer.

Risk 

Risk 

Short Duration Fund

Short duration funds are at the lower end of the interest rate risk spectrum, higher than duration funds, but lower than medium and long duration funds. Because they contain a moderate level of interest rate risk, short-duration funds strive to generate steady returns. Investors with a modest risk appetite can put some money into short-term funds and produce a stream of income using a Systematic Withdrawal Plan. Investors who wish to start constructing a debt fund portfolio should start with short-term funds. These funds provide market-related returns with a low level of risk.

Dynamic Bond Fund

Market interest rates influence the dynamic bond funds. Because of their ability to convert to short-term assets, dynamic bond funds are seen as a viable strategy to hedge against bond market volatility. In these schemes, the role of fund management is critical. In these schemes, the fund manager’s assessment of interest rates can lead to strong returns, but if the call is incorrect, investors may lose money.

Benefits

Benefits

Short Duration Fund

These contain considerably more short-term assets than medium or long-term debt funds, short-duration funds have a modest amount of interest rate risk. Because fund values do not move greatly in reaction to changes in market rates, these funds produce relatively consistent returns over interest rate tightening and easing cycles. Short-duration funds increase their exposure to long-term debt when market rates fall to achieve capital gains. As a result, the decrease in interest income is offset by increased capital gains. Furthermore, these funds are more tax-efficient than bank deposits since, if redeemed after more than three years, the fund is tax-free.

Dynamic Bond Fund

As the name suggests, these funds are dynamic and can invest in a variety of securities over a long period of time. Unlike other debt funds, they are not bound by any investing instructions. They are unrestricted in their investment choices, which include both short and long-term securities. Their dynamic asset allocation also allows them to profit from interest rate fluctuations. They can invest in long-term securities if interest rates are lowering. They can invest in short-term securities in the event of rising interest rates. When it comes to taxes, To gain a tax benefit, one needs to invest in dynamic bond funds for at least 3-5 years. Dynamic bond funds are taxed at a rate of 20%, with the advantage of indexation.

Original news source Credit: www.goodreturns.in



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