This fund racked up impressive gains in the recent past by steadily maintaining a high-quality portfolio. This 4-star's trailing 1-, 3- and 5-year returns are above category average. The fund has achieved this by aggressively managing interest rate bets and astute selection of high-quality bonds with wide diversification. But when this bond fund -- launched in 1995 -- started out as a corporate bond fund. And that too with a higher exposure to below AAA bonds.
Its asset base has grown steadily, although for a brief period between February and March 2000, it saw an erosion of Rs 334.60 crore -- by far the highest. The explanation: redemption, considering the fund's returns were in the negative zone. Subsequently, in April, following the rate cut, the fund benefited from its higher maturity and its asset base increased substantially.
As for the fund's average maturity, it has taken wild swings --- between 2.14 and 6.58 years. But, most important, the fund manager took timely bets to handle interest rate fluctuations. For example, during the rate hike of July 2000, the fund reduced portfolio maturity to 2.14 years and increased cash stake, which minimised its loss. Alternatively, it kept its portfolio maturity relatively longer than category average during rate cuts, which, of course worked well in 2001, when the bank rate was reduced on three occasions.
As a result, longer-than-average portfolio maturity boosted the fund's return. This was helped further by increasing allocation to gilts. Initially, the fund took small exposure to gilts, but post-December 2000, it has gradually increased it. Consequently, in 2001, it gained 16.83% as against category average of 15.76%.
Once again fund manager Shailendra Jhingan is upbeat on corporate bonds, as he feels, that yields on gilts have bottomed out. Hence, he is planning to reduce the fund's gilt stake. Already, the fund has reduced its portfolio maturity from 5.26 years to 4.53 years. Rightly so as less focus on long-duration bonds will reduce the fund's sensitivity to rate swings. However, maintaining a high cash stake is debatable as this could impact the fund's return in the near future.
Overall, while it may not be a top-performing bond fund, we think its steady performance and smart strategy makes it a strong case for long-term bond fund investors.