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LIC Bond Fund

While striking a balance between credit quality and interest rate risk,the medium term debt fund has posted a total return of 14.60 percent.

LIC Bond is a medium-term debt fund launched in May 1999. While investors can invest at NAV, exit within 6 months attracts a load of 0.5 per cent. Under its dividend option, the fund has paid six dividends aggregating to 23.5 per cent.

This medium-term debt fund seeks to provide reasonable income through investment in quality debt and money market instruments. The fund has given a total return of 14.60 per cent since launch. A relatively high return initially was on account of a larger exposure to AA rated debt instruments. These instruments offer higher coupon income for being lower on the credit quality ladder. However, lower rated bonds also hamper the liquidity of the portfolio.

While the AA component went to as high as 55 per cent in February 2000, it has been pruned in recent times. Further, with the steady growth in corpus, the focus has gradually shifted to AAA rated instruments that now accounts for about 60 per cent of the corpus while AA paper makes up 27 per cent. Within AAA rated instruments, the fund has largely focussed on coupon earning corporate instruments, with a lower allocation to Government Securities and has largely steered clear from trading profits.

The changes in interest rates affect the performance of bond funds. As interest rates move down, bond prices move up and vice versa and hence, the returns posted by the fund. This movement in response to interest rates is more pronounced in case of long term instruments. While the current maturity stands at a conservative 3.72 years, the fund does not offer its portfolio maturity for comment over a longer time frame. Yet, with a predominant exposure to corporate bonds, the fund is likely to be at the low to medium -end of the maturity spectrum. In the last two years ending July 20, the fund has gained 14.78 per cent against a category average of 13.42 per cent over the same period.

With a steadily growing size, LIC Bond fund holds a reasonable corpus of Rs 921.76 crore. With a growing size, LIC Bond has shifted focus from lower quality instruments while striking a balance between credit quality and interest rate risk. While this is a step in the right direction, it needs to be sustained and consolidated for a healthy performance.