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UTI Bond Fund

UTI Bond has been a below average performer with the three-year return at 12.74% on July 31, 2001 against the category average of 13.32%

UTI Bond Fund is a medium-term debt fund from Unit Trust of India launched in June 1998. The fund does not charge any entry load but levies an exit load if investments are redeemed before six months. UTI Bond recently introduced a dividend option but is yet to make any income distribution. Thus, returns so far have come with appreciation in net asset value.

UTI Bond Fund has built a portfolio of corporate debentures since inception and has largely steered clear of government securities (gilts). Thus, the fund aims at generating returns by earning a steady interest income with little emphasis on trading profits. By virtue of their high liquidity, gilts offer an opportunity for active buying and selling and are highly sensitive to interest rate changes.

Among corporate bonds, UTI Bond has maintained a significant investment to lower rated instruments. These bonds offer a higher coupon income for being low on credit quality. For instance, the fund had a 37% exposure to below AAA rated debt securities including BBB papers on June 30, 2001. The portfolio composition reflects that the fund is susceptible to credit and liquidity risks. On the other hand, with poor liquidity in corporate papers, it is largely insulated from interest rate gyrations. While the fund does not disclose its portfolio maturity, the large holding in corporate bonds suggests that it has stayed on the lower end of the maturity curve.

UTI Bond has been a below average performer with the three-year return at 12.74% on July 31, 2001 against the category average of 13.32%. In a period when interest rates have been on a steady decline, its peers have raced ahead with aggressive management of gilt investments. In the current calendar of soft interest rates, the fund has returned only 9.28% against the average return of 9.97%. Further, its investments in below AAA bonds could also pose credit problems while any significant redemption pressure can impair liquidity. With other bond funds available with better service standards, investors should avoid UTI Bond.