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Quality Is The Catch

IL&FS Bond makes an interesting case for conservative but long-term fixed income investor. Its return since launch of 12.86% may not be particularly impressive but its stable performance is an advantage.

It may come as a surprise that IL&FS Bond is creating waves now. Never mind if its total return since launch as against its peers isn't very exciting. But in lieu of that it offers a bunch of quality portfolio for the high safety seekers. And now it's getting its dues, as investors have started treading here.

IL&FS Bond in its whole track record has returned as much as it earned in the trailing 1-year, i.e. 13%. And this lands it in the middle of its category. Always bagging a three-star in Value Research Fund rating speaks volumes of its consistent risk-reward profile. And that's precisely because unlike most of its peers its neither too defensive nor does it shoot out lights during rallies.

Though a management change here since 2001, IL&FS Bond has by and large struck to its thrust on quality and liquidity rather than compromising on credit quality for sake of returns. That is why Triple AAAs and Gilts have commanded an average 67% of the fund's assets. At the same time, the fund manager quite oftenly goes down the credit ladder for picking up yields. But as said earlier, gaining critical mass in the current year, has seen it reducing its exposure to below AAA instruments to an average 11% as against an average 21% till December 2001.

Credit risk apart, this fund since its launch in July 1999 has so far seen only good times, of falling interest rates. And its shyness from long-maturity papers, which prove to be best bet in these times, had a role to play in its underperformance. But the change of guard perhaps did the trick, as the fund manager actively stretched out the portfolio duration—a measure of sensitivity to interest rates, as and when the interest rate outlook seemed favorable. The result-a 16.80% in 2001, which bettered almost half of its peers.

But mind you, its focus on gilts invites volatility too. And its quite visible from its performance during uncertain times. So a long-term stay is recommended here.

Overall, on a small asset base until recently, IL&FS Bond Fund boasts of pretty good record. However, it needs to be seen whether that can be sustained over a large asset base or not.