Dynamic Bond Funds: Features, Benefits, Taxation & More

Dynamic Bond Funds are a type of debt mutual fund with a flexible average maturity period. These funds switch between long-term and short-term instruments depending on interest rate fluctuations.

DBF takes advantage of interest rate changes by dynamically altering the allocation to gain optimal returns.

Interested? Read along for more information.

How Do Dynamic Bond Funds Work?

Let’s get into some basics before exploring the DBFs.

Debt funds are a combination of various bonds, commercial papers, T Bills, etc. Each of these instruments has a different maturity period. Combined, the debt funds get the average maturity period of all these bonds.

Whenever interest rates fall, bond prices go up and vice versa. In a falling interest rate scenario, long-term funds perform better. Short-term funds tend to deliver superior returns in a rising interest rate scenario.

Dynamic Bond Funds are designed to deliver superior returns in any interest rate scenario. These funds do not have predefined maturity. 

If the fund managers think the interest rates are falling and may fall further, they will switch the allocation to long-term bonds. Otherwise, they will switch the allocation to short-term bonds. 

In both rising and falling interest rate scenarios, you get optimal returns. 

Top 3 Benefits of Dynamic Bond Funds

1. No Debt Fund Mandate

Most debt funds have to follow an investment mandate. For example, short-term debt funds can only have short-term instruments as a base investment. Long-term debt funds only allocate assets among long-term instruments.

Dynamic Bond Funds do not have any restrictions. Fund managers can dynamically allocate assets among instruments with varying maturity periods.

2. Optimal Returns

Bond prices are inversely proportional to interest rates. There’s always a risk of losing profit when interest rates fluctuate.

Fortunately, Dynamic Bond Funds can shift allocations between different instruments to generate optimal returns.

3. Expert Fund Management

Investors do not have to worry about interest rate scenarios as fund managers take care of everything. Fund managers make the calculated decisions to switch the underlying instruments to deliver superior returns.

Things To Consider Before Investing In Dynamic Bond Funds

1. Fund Manager

As mentioned above, fund managers are responsible for dynamically altering the underlying assets. 

Fund managers’ calculations and expertise are extremely important here. In any interest rate situation, the fund manager’s judgments are ultimately going to decide how much return you earn.

This brings us to the next point.

2. Risk

Returns on Dynamic Bond Funds are comparatively less affected by interest rates. By shifting the portfolio, fund managers can balance the risk to optimize the returns.

However, interest rates don’t always work in your favor. If the fund manager’s strategy fails to align with an interest rate, you may lose profit.

3. Economical and Political Matters

Changes in government policies, prices of oil and gas, and political matters can affect returns on dynamic bond funds. The returns might boost or fall, it could go either way.

It’s always better to be aware of such factors to plan your investment. Economical and Political matters often alter in the short term. You may save the loss by investing for a longer horizon. 

4. Fund’s Track Record

It is advisable to examine the track record of the fund before investing in it. Be it equity or debt funds, check the fund performance across various interest rate cycles.  

For dynamic bond funds, don’t invest via NFO. Instead, invest in funds that have a longer performance history to glance at.

Tax Implications

Post April 2023, tax rules on debt funds have been changed. 

Both Long and Short term capital gains will be taxed as per the investor's tax slab.

Long-term capital gains are applicable when you redeem your investment after 36 months. Otherwise, short-term capital gains will be applicable. 

Who Should Invest In Dynamic Bond Funds?

Returns on Dynamic Bond Funds rely on ups/downs in interest rates. If you understand the interest rate movements, you can create your own portfolio of bonds. Otherwise, we would recommend investing in existing and well-performing funds.

DBF can be suitable for investors with moderate risk appetite. Beginners can consider DBF at a slightly later stage when the portfolio is stable. We would recommend an investment horizon of 3-5 years or more to gain superior returns. 


Dynamic Bond Funds are one of the riskier debt fund schemes. Its performance depends greatly on the fund manager’s calculations and interest rate movements.

However, these funds can also deliver superior returns. 

Dynamic Bond Funds are not suitable for everyone. But if you are curious about it, reach out to VNN Wealth. Our advisors will help you understand the fund alignment in the interest rate cycle. 

Explore more funds and diversify your portfolio with us.

Also Read:

Types of Debt Funds

FD vs Debt Funds

Mutual Funds