UTI Bond Fund packs in the twin benefits of being one of the funds with low expenses and rock-bottom volatility. Reduced volatility more than compensates for lower returns to give this fund's risk-adjusted returns (sharpe ratio), which can compare with any other fund in the category.
While this income fund is rarely likely to top its category when the going is good, it is also less likely to take a severe hit during tough times. Given UTI Bond's conservative approach towards betting on interest rate, an average performance even in bullish times is something investors can't fret over.
Since the fund believes in the philosophy of generating stable returns, corporate bonds comprise a large chunk of its portfolio, with government securities accounting for a small exposure. Therefore, a large part of its returns since launch has come through interest income rather than trading profits from gilts.
Launched in mid-1998 when interest rates were on the higher side, the fund's returns got a kicker from the high interest income. Since 1999, as rates started falling, this fund struggled while its peers made aggressive interest rate bets and flourished. Although portfolio details prior to February 2002 are not available, it is evident that it also participated in the gilt rally, though in a limited way. The fund has had a decent run in the past two years—a reasonable growth of 12 per cent which has been overshadowed by the 13-15 per cent return posted by some other income funds.
However, UTI Bond's ability to display resilience during volatile times is a plus here, although the fund lost 0.83 per cent in January 2003 against the category's loss of 0.71 per cent. This loss was still much less than that of many of its peers. Since the fund manager believes that interest rates have bottomed out, he plans to cap the fund's gilt allocation to 15-20 per cent.
Interest rate risk apart, UTI Bond has overhauled its corporate bond portfolio in favour of AAA issues. In the past year, the fund has reduced the share of below-AAA paper from 37 per cent to 21 per cent.
Simply put, lower volatility and returns at a reasonable cost (low expense ratio) is what UTI Bond brings to the table—something that conservative investors will find to their liking.
This article was originally published on June 30, 2003.
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