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A High-Yield Bond Fund

LIC Bond tries to secure stable returns from a portfolio dominated by corporate bonds. The fund is likely to meet expectations of investors seeking higher yield.

Riding on the back of a corporate bond-tilted portfolio, LIC Bond has consistently beaten a vast majority of its bond fund rivals. The fund's handsome annualised gain of 13.25 per cent every year since its launch in May 1999 to December 3, 2003 with low volatility provides testimony to this. Cautious investors seeking a high-yielding bond fund will like this fund.

Corporate bonds have always remained the mainstay of LIC Bond. And in corporate bonds, the fund has a liking for lower-rated papers, of which it has a higher proportion than the average bond fund does.

Gilts have played a smaller role. Sure, this meant that in 2001, when gilts yielded superb returns, its strategy of relying on bonds (putting 50 per cent of its corpus in bonds against just 10 per cent in gilts) meant that its 16.2 per cent return was not one of the hottest that year.

But in 2002, LIC Bond donned an aggressive look and thus benefited from the falling interest rates. Though it continued to rely on corporate bonds, its higher maturity compared to its peers helped it post a top quartile return of 17.28 per cent in 2002. Despite that bolder-than-average approach, the fund hasn't been any more volatile than its peers. Maybe that explains why investors have been drawn to LIC Bond in droves, making it the sixth largest bond fund now. This also means that LIC Bond has entered a critical phase as it ponders on a strategy to service such a large 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.

This year, however, LIC Bond's returns are not that impressive. This is largely due to the fund's poor performance during the volatile first quarter of 2003 -- while the category was down 0.10 per cent, LIC Bond lost 0.35 per cent. Since then, the fund has adopted a relatively cautious approach towards investing. In the past seven months, the fund's average maturity has moved in a low band of 4.74-6.01 years. Though this strategy has restricted the upward movement, it should help LIC Bond in reducing the downside risk in future.

The fund's recent sluggishness should not be a cause for concern as it boasts of a decent long-term performance track record. The fund also benefits from its low expense ratio, which provides a sustainable advantage over its peer. LIC Bond is basically a worthy choice for investors seeking high yields through a portfolio laced with corporate bonds.