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What Are Dynamic Bond Mutual Funds & Who Should Invest?

Is a Dynamic bond fund actually dynamic? Read this blog to know what the name means. Find out how a Dynamic bond fund works, how it works, and if you should invest in dynamic bond funds using Cube Wealth.
February 2, 2021

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The word dynamic means “active”, and that’s exactly what a Dynamic bond mutual fund does - it actively trades securities based on the rising and falling interest rates in India. 

Let’s put the dynamism of Dynamic bond mutual funds to test by understanding how they work, what they invest in and whether or not you should invest in Dynamic mutual funds. 

What Are Dynamic Bond Mutual Funds?

Dynamic bond mutual funds are debt funds that invest in bonds classified as government securities. This might make you think that Dynamic bond funds are exactly like any other debt fund, but there’s a catch. 

The fund manager who handles the Dynamic bond fund has the freedom to buy bonds of any duration. Other debt funds like 10-year Gilt funds do not have this freedom, since they can only invest in Gilts that mature in 10 years.

Invest in Debt Funds handpicked by proven experts on the Cube Wealth App

How Do Dynamic Bond Funds Work?

Debt funds, in general, are affected by the rising and falling interest rates that are dictated by the RBI. This may lead to 3 scenarios:

  • Stagnant Interest Rates

Bonds are known to become less desirable if interest rates experience a long pause. In such a case, other alternatives like stocks may supplant bonds in terms of returns and preference. 

  • Rising Interest Rates

If there’s a steep increase in interest rates, bonds are observed to lose value and again, stocks may supplant them during such a case. 

  • Falling Interest Rates

When the interest rates fall, bonds have been known to gain value and as a result, may become more attractive for investors.

Unlike other debt funds, Dynamic bond mutual funds have the potential to generate lucrative returns during all 3 cycles mentioned above. 

The fund manager in charge of the Dynamic bond fund can assess the interest rate situation and leverage the freedom that these funds have to buy and sell securities based on various tenures. 

For example, if the interest rate falls below the coupon rate, the fund manager can switch to long term securities to mitigate the risk. 

This dynamic switch between various tenure-based securities allows Dynamic bond funds to make the best of whatever interest rate scenario presents itself. 



Portfolio Maturity

Liquid Funds

60-91 days

Overnight Funds

1 day (overnight)

10-Year Gilt Funds

10 years

Dynamic Bond Fund

Varying (according to interest rates)

What Is Coupon Rate?

Whoever issues a bond will pay an interest rate on it. This is known as the coupon rate. 

Factors To Consider Before Investing In Dynamic Bond Mutual Funds In India

1. Fund Manager

The dynamism of a Dynamic bond fund depends entirely on the acumen of the fund manager and their ability to make the right call during various interest rate cycles. 

2. Risk

Dynamic bond funds are debt funds which naturally means that they carry lower risk than equity funds. However, they’re still market-linked instruments that are impacted by the rising and falling interest rates.

3. Bonds & Interest Rates

As mentioned previously, rising interest rates tend to devalue bonds and falling interest rates tend to prop up the value of bonds. Thus, the fund manager’s intervention and nuanced approach to handling the interest rate changes are paramount to delivering positive returns. 

4. Investment Freedom

Dynamic bond funds have the freedom to invest in bonds that have a short, mid or long tenure. 

5. Tax

Dynamic bond funds are taxed like debt funds:



Holding Period

Tax Rate


Short Term Capital Gains

< 3 years

As per I-T bracket


Long Term Capital Gains

> 3 years



Conventional logic would state that there are perks to staying locked-in for 3+ years in a dynamic bond fund if you’re an investor from a higher tax bracket. 

But it's always better to download the Cube Wealth app and take the risk quiz to understand what type of debt fund you should invest in and for what duration. 

Who Should Invest in Dynamic Bond Mutual Funds?

Dynamic bond funds have been known to generate better returns than FDs and other traditional assets. Thus, both conservative and aggressive investors may benefit from including these funds in their portfolio. 

However, whether or not you should include Dynamic bond funds in your portfolio would depend on your goals and risk tolerance. Speak to a Cube Wealth Coach to learn more.

How To Invest In Dynamic Bond Mutual Funds In India?

The Cube Wealth app helps you invest in the best dynamic bond funds based on your goals and risk appetite. The process is very convenient:

  1. Download the Cube Wealth app
  2. Complete your KYC
  3. Take the risk analysis quiz
  4. Get curated fund recommendations
  5. Tap on invest

Cube Wealth’s mutual fund advisory partner, Wealth First, curates a list of the best mutual funds that Cube users can access every month. Moreover, Wealth First also advises you on when to sell a fund. 

Download the Cube Wealth app to start your mutual fund investment journey

Best Dynamic Bond Mutual Fund Currently Recommended On Cube Wealth

IDFC Dynamic Bond Fund

  • 1-year returns: 11.04%
  • 3-year returns: 10.23%
  • 5-year returns: 9.28%

Watch this video to understand why you need a quality wealth advisor

Priya Bansal
Curious about personal finance and all things money. Can either find me reading a book or dancing to a tune.

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