In India’s current scenario of steady interest rates, debt mutual funds emphasising short-term duration approach and strategic exposure to lower-grade credit securities are well-positioned to generate favourable returns. Dynamic bond funds, which adaptively distribute investments across duration and credit categories based on anticipated interest rate movements, are well placed to do this.
Within the dynamic bond fund space, Aditya Birla Sun Life Dynamic Bond Fund (ADBF) stands out as a good performer, having effectively managed diverse market scenarios. The fund has achieved a compounded annual growth rate of 7.6 per cent since its inception in September 2004.
Investment strategy
ADBF employs an unrestricted investment approach characteristic of dynamic bond funds. The portfolio spans the entire duration spectrum, from very short-term instruments to extended-maturity bonds of 40–50 years, while covering the complete credit quality range from government securities to A-rated corporate bonds. The fund’s flexible methodology operates through three primary mechanisms: securing duration benefits during declining interest rate phases, generating carry income through coupon earnings in low-rate scenarios, and exploiting spread differentials by alternating between Government Securities (G-Secs), State Development Loans (SDLs), and corporate bonds across AAA/AA/A ratings.
Duration management
The fund has demonstrated active duration management over the past five years, with Macaulay duration fluctuating between 1.7 and 8.6 years. When repo rates increased following Covid-19, to address inflation concerns, the fund tactically shortened duration to 1.7 years in May 2022, enabling outperformance with 2.8 per cent returns versus the category’s 2.1 per cent average. Subsequently, from May 2022 through April 2024, expecting interest rate reductions, the fund increased duration to 8.5 years, achieving category-leading annualised returns of 8.2 per cent compared to the category’s 6.4 per cent. During April 2024 to August 2025, amidst declining rates, it recorded 9 per cent returns against the category’s 7.8 per cent.
Presently, the fund is shifting from duration-centred to credit exposure tactics, leveraging the reduced rate environment. Duration has been decreased from 9 to 6 years while incorporating AA-rated investments yielding 8.5-9 per cent.
Credit risk profile
The fund’s investment universe spans from sovereign securities to ‘A’ rated corporate instruments. Generally, AA and A-rated papers constitute approximately 20 per cent of holdings but may increase to 35–40 per cent when spreads present attractive opportunities. Remarkably, it remains the only fund in its category maintaining nearly 2 per cent allocation to an A+ rated instrument from Adani Airport Holdings. While allocations to ‘A’ rated securities enhance return potential, they also elevate credit risk.
Among peers, ADBF is one of four, along with ICICI Pru All Seasons Bond, 360 ONE Dynamic Bond, and Mahindra Manulife Dynamic Bond, that maintain higher AA-rated paper allocations. Notable AA-rated issuers within the portfolio include Jubilant Bevco, Nuvama Wealth Finance, Vedanta, SK Finance, Cholamandalam Investment & Finance, and Muthoot Finance. Non-AAA credit exposure is limited to 3 per cent per issuer, with most maturity periods confined to two to three years.
The fund had about three per cent invested in Jharkhand road project bonds that turned distressed during the IL&FS crisis in the 2020s. The issue was later resolved through the Supreme Court, enabling the fund to recover its entire money and exit the investment.
The current portfolio composition balances 35–40 per cent in government securities (primarily 15-year G-Secs), 35–40 per cent in AAA corporates with 5–10-year maturities, and 20 per cent in non-AAA instruments. The fund manager indicates that as yields continue to decline, duration will be reduced to 2–3 years, redirecting emphasis from capital appreciation to carry and spread strategies.
Performance
ADBF has maintained consistent placement within the top two quartiles over the previous five years. Three-year rolling returns over the last five years reveal the fund generated an average annual return of 7 per cent, surpassing the category average of 5.8 per cent. The fund’s returns varied between 5.5 per cent and 9.4 per cent during this timeframe.
As of July 31, 2025, the fund portfolio maintained a yield to maturity (YTM) of 7.3 per cent, exceeding the category average of 6.7 per cent. The fund imposes relatively elevated fees. The regular plan’s expense ratio stood at 1.23 per cent, nearly matching the peer average. The direct plan’s ratio was 0.64 per cent, above the category’s 0.52 per cent average.
Published on August 23, 2025
