'Benchmark yield is likely to settle around 7.5%'

MANAGER SPEAK: Nilesh Shah, chief investment officer, Prudential ICICI

The fund is profiled as a low risk income product and as such maintains an interest rate risk profile of around 1 "� 1.5 years with a limited deviation of six months under normal circumstances.

Over the last six months the fund has also endeavoured to maintain around a third of the portfolio in floating rate assets. The fund also looks to add value through limited active bets in liquid gilts.

The fund maintains liquidity through a significant exposure to liquid money market securities and also partly through a laddered maturity structure.

The fund concentrates on high quality assets in the 1 "� 2 year maturity bucket, looking to capitalize on anomalies in the yield curve as well as illiquidity spreads. We also maintain a reasonable exposure to AA+ /AA segment.

What is your view on interest rates and where do you see yields settling?

An expected fall in inflation going forward, comfortable liquidity situation and a strong rupee should keep interest rates from rising very sharply.

At the same time a healthy credit demand (which is likely to put pressure on banks for funding the credit growth by selling their investments / raising deposit rates), coupled with large government borrowing and concerns of managing inflationary pressures are likely to dominate overall policy response in favour of an upward bias for interest rates.

Hence, domestic interest rates are likely to increase from the present level with the benchmark 10-year yield likely to settle around 7.5 per cent by mid next year.

Where is the fund's portfolio maturity expected to head in the next few months?

Given the expected volatility in interest rates we expect to maintain the current low risk strategy for the present. Given the relatively high short "� medium term rates prevailing currently, we propose to maintain the average maturity at the upper end of 1 "� 1.5 year range.

How do you justify charging higher expenses for your fund?

We would prefer not to comment on this.