We launched the fund anticipating a trend reversal in interest rates over the next 12 to 18 months. So we went about sourcing longer-term papers linked to three-, five- or 10-year benchmarks.
As the interest rate outlook was benign at that time, we were able to acquire floating-rate assets at comparatively higher spreads over their respective benchmarks.
Recently, these spreads have begun to narrow due to the volatile interest rate outlook. As the benchmarks have been resetting at higher levels, the fund has been able to deliver a better performance.
Where do you see your average portfolio maturity going forward?
We prefer longer-dated assets and benchmarks. These give us a higher spread compared to shorter-dated assets. We manage the price risk by ensuring that these assets have frequent resets. Assets with periodic resets typically exhibit interest-rate risk until their next reset date.
Your exposure remains mainly in high-rated papers. Do you plan to retain the low-risk strategy?
The fund's exposure to high-rated assets is in line with our philosophy of investing in quality assets that are relatively more liquid since they provide an effective mark-to-market for the portfolio.
What is your view on interest rates going forward?
While the RBI may keep benchmark rates unchanged, we believe that Indian bond yields are likely to remain range-bound in the near term.
High commodity prices, healthy credit offtake and global rates may keep benchmark 10-year bond yields between 6.25 per cent and 6.75 per cent until December 2004.
