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Betting on Bonds

Achieving returns through a portfolio dominated by bonds has been LIC Bond's approach. The fund is likely to suit the taste buds of high-yield investors

This corporate bond believer has managed to remain a permanent fixture at the top of the bond fund performance charts. Its trailing 3-year return of 15.3 per cent, as on December 20, 2002, places it among the toppers in its category. More impressive is the stability with which these returns have been generated.

LIC Bond got there by resolutely investing in corporate papers. And amongst these papers, the fund has a liking for the AA variety. This exposure has generally been much higher than its peers. Gilts, on the other hand, have played a smaller role specially when compared to peers. Sure, this meant that in 2001, when gilts yielded superb returns, its strategy of relying on bonds - putting 50 per cent of its corpus into them, versus just 10 per cent in gilts - meant that its 16.2 per cent return was not one of the hottest that year. But then, gilts have come and gone, while the fund remains a stable source of returns without major ups and downs.

A closer look at the maturity profile shows that the fund believes in maintaining higher maturity on an average vis-à-vis its peers. Despite this bolder-than-average approach, the fund hasn't been any more volatile. Maybe that explains why investors have been drawn to LIC Bond in droves, tripling its corpus in 2001. However, that very fact means LIC Bond has entered a critical phase as it ponders on a strategy to service this huge corpus. A new approach seems to be emerging: the scheme has now raised its exposure to gilts, even as it maintains 17 per cent in below AAA-rated bonds. The outcome? Increased credit risk in order to earn a higher premium.

Thus, while it has succeeded in keeping the returns flowing to investors, posting a gain of 16.08 per cent in the year-to-date through December 20, 2002, it has also taken knocks.

The fund's 0.95 per cent exposure to the long-term NCD of BPL was downgraded to default grade. Still, its solid three-year track record speaks for itself making this fund a worthy choice for investors seeking high-yields through a portfolio laced with corporate bonds.