UTI Dynamic Bond Fund offers 19.40% returns in one year. Should you invest?

Most debt mutual funds are going through a trying time. Their prospects also look bleak as RBI is expected to raise interest rates in the coming months. However, a dynamic bond scheme, UTI Dynamic Bond Fund, has offered 19.40% returns in one year, while most debt mutual funds remain in the range of 2-7%. What is working for this fund?

Dynamic bond funds have been recommended by many fund managers in an uncertain interest rate scenario. Many advisors have been recommending them since the hike in rates started. However, not all dynamic bond funds have been successful in offering double-digit returns. The 2nd topper in the category is offering 6% returns in one year.

3-month returns 6-month returns 1-year returns 3-year returns
UTI Dynamic Bond Fund 1.10 8.93 19.40 9.01
Dynamic Bond category 2.01 1.59 3.75 6.10
Benchmark 1.59 0.76 2.84 4.15
Rank within category 24 1 1 1

The scheme has offered 8.93% returns in the last 6 months, since the rates started going up. The scheme offered 11.38% returns in calendar year 2021 and 6.58% in calendar year 2020. The fund manager says that last year the DHFL resolution gave a push to the fund.

“The DHFL resolution was good news for the fund. It was bought by Piramal holdings and hence the returns had gone up, but that was last year. Afterwards we have been bearish on rates beforehand and that has also helped the performance. The 3 month and 6 month performance of the fund is also very good because of our focus on shorter duration instruments,” says Amandeep Chopra, head-fixed income and fund manager- UTI Dynamic Bond Fund.

The fund holds 2.44% stake of Piramal Capital & Housing Finance Ltd Debenture in its portfolio at the moment. The fund invests in a total of 14 securities with an average maturity of 3.98 years. The fund has a comparatively concentrated portfolio with an average credit rating of AAA.

However, there is another thing that is pushing the returns up. The fund has got a recovery in the main portfolio from Jorabat Shillong Expressway. The paper was downgraded to D and valuation was accordingly downgraded. “The fund has gotten a recovery that pushes up the returns in the short term. Any recovery is a kind of bonus over the performance. The Jorabat papers were downgraded and now the money has come back. The fund is good in terms of usual parameters for fund selection like hygiene factors, long term performance, etc,” says Joydeep Sen, Corporate trainer and author.

Sen says dynamic bond funds can be tricky. “If the fund manager’s calls come right e.g. portfolio maturity modulation etc. The fund would do well. So far, fund managers are conservative about RBI’s rate hikes. That would gradually change as the rate hike cycle comes to an end. If you understand the fluctuations that come with dynamic bond funds, I suggest go for a fund with a long-term proven track record. Fund houses and fund managers who have navigated across market cycles well, rather than just chasing the toppers.

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