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A Gutsy Bond Fund

For investors willing to take a higher risk in debt funds, JM Income is an excellent choice. Its aggressive approach means that it will do well in a bullish debt market, but it also means that there is a higher downside risk

If you want to play a high-risk high-return game within your debt portfolio, JM Income Fund should be one of your picks. Aggressive duration management and active trading in government securities has been the way of life for this fund. Though this makes it a relatively volatile offering compared to its peer group, the top-quartile returns in the past four calendar years are more than enough to cheer about.

This oldest bond fund has gone through both good as well as bad times. But as the fund's average maturity has always been on the higher side in the category, it's been highly sensitive to interest rate changes. Thus, during the volatile first quarter of 2003, JM Income-G was unable to withstand the blowup – it lost more than its peers. But this has proved rewarding in the subsequent bullish markets. For instance, when the repo rate was cut in August 2003, the fund outperformed its peers by a great margin. But While JM Income-G gained 1.97 per cent, the category was up 1.39 per cent that month. High portfolio maturity has been the main reason for the fund's good performance in 2001 and 2002, which saw four bank rate cuts.

The fund's aggressive approach can also be seen from the fact that in the past four months, it has maintained an average maturity of over 8 years – one of the highest in the category. Though it has reduced its average maturity to 7.55 years in October 2003, it's still on the higher side in the category. This has definitely dented the fund's return in the recent volatility in the bond market. A higher investment in government securities is largely responsible for the higher average maturity of the fund. Through 2003, gilts have accounted for nearly half of the portfolio with another 30 per cent invested in AAA-rated bonds. Thus, the fund has mostly avoided credit risk, which has not been the case in the past. As against a 12-13 per cent exposure in below AAA-rated bonds in 2001 and 2002, these have accounted for an average 7 per cent in 2003.

The fund has also been an active trader of its gilt holding, which has been spread over 13-16 government securities. This is one of the reasons for a wide variation in its average maturity--in the past year, the fund's average maturity has moved between 5.74-8.53 years.

JM Income-G's strong historic performance could attract many investors. The only concern here is a high downside risk in a volatile market. Otherwise, the fund will do well in a bullish market condition. This fund should be looked at as a kicker in a bond fund portfolio.