YOUR REQUESTS: MUTUAL FUNDS: Dynamic bond funds can be held for three to five years, or even longer

I want to invest in a dynamic bond fund. What should be the ideal period of detention and what are the risks?
—RS Joshi
Dynamic bond funds have the ability / flexibility to invest in bonds or government securities through duration compartments depending on the opinion of the fund manager. If the manager believes that long term interest rates will fall, he may invest in long term government bonds / securities to profit from lower interest rates. Conversely, if he believes that interest rates should rise, he may reduce the duration of the portfolio. Sometimes the managers are known to also accept credit calls in these strategies, i.e. they invest in lower rated bonds for higher returns. Given the great flexibility of the mandate, dynamic bond funds can be considered “all-weather” debt funds and can be held for long periods such as three to five years or even longer. While investing, it is necessary to assess the skills of the manager; one indicator could be to understand how well they have gone through various interest rate cycles in the past. One should also consider the credit quality of the underlying portfolio and whether this fits well with its opinions, the expense ratio and the exit charge structure (if applicable).

Is it safe to invest in international equity funds through Indian mutual funds?
—Aman Jaggi
Mutual fund companies in India are regulated by SEBI, and the license to manage such companies is granted after due diligence required by the regulator. Therefore, the international equity funds offered by these fund companies are immune to the risk of fraud. However, like other investments, they are subject to investment risk. International funds provide an opportunity to diversify your portfolio across geographies by exposing you to various drivers of economic growth. In addition to the return based on the underlying assets, these funds also gain if the Indian rupee depreciates against the currency in which the underlying assets are denominated. Exposure to international funds could represent around 5 to 25% of your portfolio, depending on your investment horizon and your risk suitability. When investing in international funds, check the prevailing valuations in the underlying regions in which the fund invests.

The author is Director, Investment Advisory, Morningstar Investment Adviser (India). Send your questions to [email protected]