The minimum application amount is Rs 10,000 with subsequent investments in multiples of Rs 500. The initial offer is open till June 17, 1998. The fund will reopen for continuous sale and redemption from July 17. Investments for over a year will be on a no load basis. An exit load of 1.5 per cent will be charged on investments of shorter duration. The net asset value (NAV) of the fund will be declared on a daily basis. In the case of sale and repurchase application received by 2 pm on a particular day, the applicable NAV will be that of the same day. All applications received after 2 pm will be governed by the NAV of the following day.

Advantages of an open-ended bond fund: An open-end income fund enables investors to enjoy all the benefits of investing in fixed return investments and to bypass the disadvantages of investing in individual debt instruments and closed-end income funds.

Risk & return: These funds are a managed portfolio of bonds and debt issues which carry returns at a specified interval. Even though these funds do not assure returns because of regulatory restrictions, the return from these funds is in line with the prevailing interest rates trends.

As a managed portfolio, the fund managers add value on two counts. By investing in bonds, debentures or a company fixed deposit, an investor is insulated from the market risk as these are debt obligations of the issuer but he is exposed to the credit risk, i.e. the possibility of default by the issuer to repay interest and principal.

For an individual investor, it is difficult to keep track of changing credit risk profile of companies he is invested in while an asset management company like UTI has the necessary resources to do so on a regular basis. Moreover, it is also difficult for him to achieve meaningful diversification of his debt portfolio to spread his risk. An income fund facilitates helps overcome these disadvantages.

Besides, an income fund could benefit from discounted purchase of debt instruments from the secondary market which means higher yields. The funds can also profit from volatile interest rates. Thus the rate of return on a fund is difficult to predict at the time of investment unlike that of an individual fixed income instrument bought and held till maturity. But in an income fund, the income may be complemented with capital appreciation. Though the fund managers charge a fee for managing the portfolio, the benefits of a managed portfolio more than offset the costs. UTI will be charging a fee of 1.10 per cent of daily average net asset to manage the UTI Bond Fund.

Liquidity: This is perhaps the biggest advantage of investing in an open-end bond fund. Apart from providing greater diversification, less risk, lower transaction costs, and far more professional management that can be achieved by an individual investor, open end income funds have the power to turn illiquid debt investments into highly liquid ones. It is extremely difficult for an investor to sell few bonds, and if it becomes possible then he will have to take a lower-than-market price from a broker. But that same investor can sell units in an income fund, without taking any discount on the price. By liquefying the illiquid, the mutual fund changes the nature of the underlying investment.

Tax advantage: Like other open-end income funds available in the market, UTI Bond Fund offers benefit of indexation and lower tax rate to investors holding units for more than one year. Investment in the fund will be treated as long-term capital gains. This benefit is not available to fixed-return bearing investments like bank deposits, company fixed-deposits, corporate debentures or bonds and assured return income schemes.

UTI Bond Fund vis-a-vis other open ended income funds: The crucial difference between UTI's bond fund and the existing income funds will be UTI's edge on account lower costs due to marginally lower management fee and benefit of economies. Lower management fee and other expenses mean higher returns to investors. In addition, UTI expects to mobilise around Rs 400-500 crore during the initial offer which should make the fund relatively stable. UTI's experience of managing a debt portfolio of over Rs 25,000 crore could be the other advantage for UTI Bond Fund. Investors will be serviced through the 51 UTI branches across the country. However, the ability of UTI to service its investors is a critical attribute which remains suspect.

UTI Bond Fund vis-a-vis UTI's Monthly Income Plan: The UTI Bond Fund does not provide guaranteed return like the Monthly Income Plans (MIP) from UTI though it offers superior liquidity with greater transparency. So with two bond funds from UTI of different structure, currently open for subscription, which fund should one invest in? Based on long-term interest trend, the interest rates are only expected to steadily decline, before they fall in line with the global interest rates. Hence, long-term investors should choose the guaranteed return MIP, as these funds guarantee a minimum return for the entire term i.e. next five years. Hence, even if the interest rates falls and the fund fails to achieve the minimum return, MIP investors do not stand to lose anything. However, investors with a relatively short investment perspective of one year or above and not wanting to lock money for five years, should choose UTI Bond Fund. Also, the investment in UTI Bond Fund offers benefit of indexation and lower taxrate to investors holding the units for more than one year, as the appreciation from the fund will be treated as long-term capital gains. This benefit is not available to all options of MIP. The dividend income from MIP is exempt under section 80L only, i.e. upto Rs 15000.

The bottomline: Conservative investors who can lock their money for next five years should choose MIP. Investors with shorter investment perspective or in higher tax bracket and seeking non-guaranteed steady returns should invest in UTI Bond Fund.